SSgA SPDR unveils world’s first emerging markets inflation-linked bond ETF

Apr 25th, 2013 | By | Category: Fixed Income

SPDR ETFs, the exchange-traded funds (ETF) platform of State Street Global Advisors (SSgA), has unveiled the world’s first ETF to deliver pure exposure to emerging markets inflation-linked debt. Debuting on the Deutsche Börse – additional cross-listings are likely over time – the SPDR Barclays EM Inflation-Linked Local Bond UCITS ETF (SYBI) will appeal to investors looking to diversify emerging market exposure while hedging against accelerating emerging market inflation.

SSgA SPDR unveils world’s first emerging markets inflation-linked bond ETF

A construction boom in Brazil (Sao Paulo pictured), much of it in advance of the World Cup and Olympic Games, has contributed to inflation which now stands at over 6.5%.

The fund is benchmarked to the Barclays EM Inflation-Linked 20% Capped Index, an index which includes inflation-linked sovereign bonds issued by Brazil, Mexico, Chile, South Africa, Poland, Turkey, Israel, South Korea and Thailand.

Inflation-linked bonds – mainstream investment products in developed markets such as the UK and US – are less frequently thought of when in investing in emerging markets debt. However, with populations growing at breakneck speeds, governments undertaking major construction and infrastructure projects, ever expanding wealth, surging food prices and buoyant credit creation, the prospects for inflation in emerging markets are very real. Indeed, countries such as India, Turkey, Egypt and Brazil appear to be in a never-ending battle with inflation, which currently rages in excess of 6% per annum.

But, in addition to home-grown inflation, the great developed market experiment of quantitative easing (QE), which is essentially money printing, is also proving to be inflationary worldwide. Much ‘hot’ capital being thrown off by these schemes is finding its way into investment opportunities in emerging markets, putting further upward pressure on emerging market inflation rates.

This new ETF, which tackles some of these issues, is therefore likely to garner significant interest from professional and retail investors alike, especially given recent research showed that almost half (47%) of investors are looking to increase their allocation to the emerging markets debt asset class over the next three years.

The research, conducted by SPDR ETFs during March this year, showed that the key drivers for this increased allocation are the benefits of diversification (49%) and the superior yields that emerging markets bonds offer over developed market debt (40%). The research also identified that inflation is indeed a concern for pension professionals and asset managers, with three-quarters (75%) of respondents expecting global inflation to rise in the next 1-3 years and more than two-thirds (70%) believing that it will be higher in emerging markets than in developed.

The market for emerging market inflation-linked bonds has grown strongly over the past 10 years, with the number of issuers doubling and the number of issues increasing threefold, according to data from Barclays. The total market now stands at almost $600 billion, approximately the same size as the hard currency emerging markets government universe, giving it sufficient size, depth and liquidity for an indexed approach to investment.

Attractive growth opportunities and concerns about inflation have been two traditional hallmarks of emerging market economies, and while the former has been relatively easy to access for investors through emerging markets equity and more recently emerging markets debt, direct access to inflation-linked bonds has been more difficult for many. Only 19% of respondents to the SPDR ETF research said that they currently found it easy to access emerging market inflation-linked bonds.

Commenting on the launch, Scott Ebner, global head of product development for SSgA, said: “The SPDR Barclays EM Inflation-Linked Local Bond UCITS ETF gives investors simplified access to a diversified portfolio of local currency inflation-linked bonds for the very first time. Investors are increasingly looking for ways to diversify their emerging markets exposure beyond traditional equity allocations and are cognisant of prospective inflationary pressures.”

He added: “This new launch is the latest example of SSgA’s leadership in providing simple solutions for European investors to difficult segments of the fixed income market and an extension of the spirit of innovation that has been part of our global SPDR ETF business for over 20 years.”

The fund, which is physically replicated, has a total expense ratio of 0.55%. It is eligible for ISAs, SIPPs and has UK Reporting Status.

There are now 46 SPDR ETFs listed on European exchanges including the London Stock Exchange and Deutsche Börse.

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