The FNB Government Inflation-Linked Bond ETF
While Covid appears to be a thing of the past, the world now faces a new challenge – soaring prices. Factors that spurred the inflationary pressures include global supply disruptions brought on by Covid, prolonged accommodative monetary policy and intensified fiscal stimulus during the pandemic. In addition, the war between Russia and Ukraine restricted energy and food supply, adding to fuel and food inflation
Most central bank policymakers were caught off-guard by the magnitude of the spike in inflation. The South African Reserve Bank is an exception as it began its hiking cycle in November 2021. The endeavour to increase interest rates in a bid to bring inflation to a halt comes at a cost of lower valuations for stocks while impeding economic activity. Low and stable inflation is beneficial for stock markets, governments, financial services providers and households. This is because most financial products are somewhat linked to inflation for providing certainty. Governments often borrow at the rate of inflation, which if elevated can open the door to ballooning debt.
The performance of government bonds is influenced by a multitude of factors, such as economic growth, political stability, revenue base, current account balance and the rating of the country’s debt by the S&P Global and Moody’s ratings agencies. The agencies research the sovereign’s ability to repay debt and have SA’s rating on sub-investment grade as a result of structural issues such as high unemployment, ailing SOEs and ballooning debt.
The objective of the Ashburton Inflation ETF is to provide investors with a real rate of return above inflation through exposure to a diversified portfolio of government inflation-linked bonds. It has a total expense ratio of 0.41% and a tracking error of 0.26% over the past three years
Fund suitability
- This ETF is suitable for investors seeking a cost-efficient and convenient investment with exposure to a diversified portfolio of government inflation-linked bonds. The fund offers quarterly distributions with no prescribed fixed investment period.
Fees
- The fund has a total expense ratio of 0.41%.
Top Holdings
- The fund invests in bonds based on the value issued by National Treasury and the listed value on the JSE. It also aims to track the performance of the FTSE/JSE IGOV Index.
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Background: Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets. They are traded the same way as shares and the main difference is that whereas one share gives exposure to one company, an ETF gives exposure to numerous companies in a single transaction. ETFs can be traded through your broker in the same way as shares, say, on the EasyEquities platform. In addition, they qualify for the tax-free savings account, where both capital and income gains accumulate tax free.
Benefits of ETFs
- Gain instant exposure to various underlying shares or bonds in one transaction
- They diversify risk because a single ETF holds various shares
- They are cost-effective
- They are liquid – it is usually easy to find a buyer or seller and they trade just like shares
- High transparency through daily published index constituents
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