Lyxor unveils Europe’s cheapest US TIPS ETF

Aug 19th, 2016 | By | Category: Fixed Income

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Lyxor, Europe’s third largest provider of exchange-traded funds, has expanded its range of fixed income ETFs with the launch of the Lyxor US TIPS (DR) UCITS ETF (LSE: TIPU).

Lyxor unveils Europe's cheapest US TIPS ETF

Lyxor’s US TIPS ETF will appeal to investors concerned about the prospect of rising US inflation.

The fund, which has been listed on the London Stock Exchange, is referenced to the Barclays US Government Inflation-Linked Bond Index and provides exposure to US Treasury Inflation-Protected Securities, or TIPS.

Lyxor’s core sovereign bond ETF suite includes US, UK and European government bond exposures of varying maturities, as well as US and Euro breakeven inflation rate exposures.

Lyxor has been steadily building up its core fixed income ETF range in recent years to reach number three in Europe for fixed income ETFs with over EUR 11bn in assets under management, and number two for physical fixed income ETFs.

Chanchal Samadder, Head of UK and Ireland ETF Sales at Lyxor, said: “Our new TIPS ETF adds to our range of low cost, physical ETFs. With the full complement of traditional and inflation linked US and UK government bond exposures, we can provide investors with the tools they need to navigate this increasingly complex interest rate environment”.

The new fund will appeal to investors seeking exposure to US Treasuries but who are concerned by the prospect of rising US inflation.

TIPS provide investors with protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the US Consumer Price Index. When a TIPS matures, investors are paid the adjusted principal or original principal, whichever is greater. TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.

Although US consumer price inflation was flat in July, increases in house building and industrial output suggest the economy is once again gathering momentum. The labour market also continues to strengthen, and just this week New York Fed President William Dudley said the US central bank may raise rates when its Federal Open Market Committee meets next month. These are all signs inflation may be about to pick up.

Lyxor also expects the ongoing demand for safe haven assets to drive interest in the fund, noting that European-listed ETFs tracking government bonds have gathered €4.7bn in net new assets between 1 January and 29 July 2016 as volatility in global equity markets has risen.

As of 17 August 2016, the underlying index had 37 constituents primarily in the 10-15 year maturity bracket (55.8%), followed by the 7-10 year bracket (14.0%) and 3-5 year bracket (11.1%). It was up 7.6% year-to-date, as of 31 July 2016.

The fund has a total expense ratio (TER) of 0.09% and is available to trade in USD (ticker: TIPU) and GBP (Ticker: TIPG).

It is notably cheaper than equivalent TIPS offerings from iShares and SSGA, namely the iShares $ TIPS UCITS ETF (LSE: IDTP) at 0.25% and the SPDR Barclays US TIPS UCITS ETF (LSE: TIPS) at 0.17%, both of which track the same Barclays US Government Inflation-Linked Bond Index. In the current low-yield environment, this price advantage will no doubt help the fund to attract assets.

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