Greek crisis prompts strong flows into gilt ETFs in 2015

Aug 11th, 2015 | By | Category: Fixed Income

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Exchange-traded funds (ETFs) tracking UK government debt securities recorded significant growth in demand in 2015 as investors sought to re-allocate into safer, non-euro-denominated assets amidst the ongoing debt crisis in Greece. “Remaining separate from the euro has insulated the UK from the turmoil in Europe, so gilt yields have been less volatile,” says Adam Laird, passive investment manager at financial services company Hargreaves Lansdown.

Greece crisis prompts high flows into UK Gilt ETFs in 2015

Policy announcements from the Bank of England will be the driving force behind future flows in and out of UK Gilts ETFs.

Research from ETFGI, an ETF research and consultancy firm, shows that these funds have recorded £552m inflow thus far this year, the most popular of which is the iShares Core UK Gilts UCITS ETF (IGLT LN) which now boasts assets under management of over £1.2bn.

Low retail inflation in the UK has increased the attraction of these ETFs especially as yields remain at very low levels. The current yield on 10 year UK Gilts is only 1.87%. Considering inflation is only around 1%, investors can still expect to earn a positive real return by investing in these safe assets.

With Greece on the brink of an €86bn bailout deal with the IMF, ECB, European Commission and European Stability Mechanism, the markets appear to be less worried about the potential for a ‘Grexit’. “I think any flows to gilts resulting from Greece have stopped. It’s the words and actions of the Bank of England that will dictate where money goes from here,” said Laird.

Investors continuing to hold investments in ETFs tracking UK Gilts will need to be vigilant. There is current expectation of an interest rate hike by the Bank of England to occur around the start of 2016.

The iShares Core UK Gilts UCITS ETF (IGLT LN) has a weighted average maturity of 14.4 years, a weighted average coupon of 3.8%, an effective duration of 9.8 years and a weighted average yield to maturity of 1.7%. The total expense ratio is 0.20%.

The Vanguard UK Government Bond UCITS ETF (VGOV LN) is another notable gilt ETF. The weighted average maturity of this fund is 15.6 years, the weighted average coupon is 3.6%, the effective duration is 10.4 years, and the weighted average yield to maturity is 2%. The total expense ratio is 0.12% which may attract investors given the low yields on these ETFs.

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