European fixed income specialist Tabula Investment Management has introduced a new ETF that aims to help investors better manage the effects of US inflation, particularly in light of the Federal Reserve’s recent announcement that its inflation target would now incorporate a catch-up element for previous undershoot.

The ETF aims to help investors better manage the effects of US-based inflation.

The Tabula US Enhanced Inflation UCITS ETF has listed on Borsa Italiana (TINE IM) with cross-listings pending on London Stock Exchange (TINF LN) and BX Swiss (TINC SW).

The ETF, which has been seeded with €2 million, comes with ongoing charges of 0.29% for an unhedged USD share class (LSE and BX Swiss listings) and 0.34% for a EUR-hedged share class (Borsa Italiana listing).

It is linked to the Bloomberg Barclays US Enhanced Inflation Index and is thought to be the first ETF to provide access to both realised and expected inflation in a single wrapper.

The underlying reference index has been developed by Bloomberg, in consultation with Tabula, and measures the performance of a diversified portfolio of US Treasury Inflation-Protected Securities (TIPS) combined with exposure to medium-term US inflation expectations. The two sleeves are weighted at 100%.

The TIPS portfolio is composed of securities with at least $500m face value outstanding and at least one year remaining until maturity. TIPS differ from regular Treasury bonds in that the principal amount of a TIPS issue is adjusted over time to reflect changes in the underlying Consumer Price Index, a measure of inflation. The yield on TIPS thus reflects a real interest rate where the effect of inflation has largely been stripped out.

The index’s exposure to inflation expectations is represented by a long position in 7-10 year TIPS and a short position in regular 7-10 year Treasuries to hedge out duration risk. An increase in 7-10 year inflation expectations will lead to a net appreciation in value as increasing inflation expectations cause the yields on regular Treasures to rise and their prices to fall, thus delivering positive performance for the short component of the trade. The short position is adjusted in order to offset the duration exposures of the two indices, thereby establishing a purer play on inflation expectations.

Tabula aims to directly replicate the index by taking a physical position in relevant TIPS and entering into an over-the-counter total return swap agreement in which it receives the return of the inflation expectations portfolio in exchange for agreed payments to the swap counterparty, BNP Paribas.

Commenting on the launch, Michael John Lytle, CEO of Tabula, said, “ETFs are a natural choice for inflation exposure. Inflation is an escalating concern among institutional investors, jumping up in their focus list over the last three months. Existing inflation ETFs force investors to choose between realised inflation and inflation expectations. For many investors, both are important measures and a more efficient solution is to combine them, which is what we have done with the Tabula US Enhanced Inflation UCITS ETF.”

Jason Smith, CIO of Tabula, added, “Forecasts of where inflation might go have rarely been as diverse as they are today. The economic consequences of the COVID-19 pandemic, and policy reactions to it, have led simultaneously to forecasts of deflation, as well as forecasts of inflation rates moving sharply higher. As the decade-long trend of stable and limited inflation rates is likely coming to an end, investors need flexible and convenient tools to manage their inflation exposure.”