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NEW! SATRIX ILBI ETF

Article by Satrix Investments

Let's review the key aspects of the Satrix ILBI (inflation-linked bond) ETF which listed on the JSE on 24 Feb 2017.


Satrix is launching new ETFs

During the course of 2017, Satrix will be adding a range of exciting new ETFs to our product suite. As a first phase, we have decided to expand the range to offer two crucial asset classes, namely listed property and inflation-linked bonds. Both these asset classes play an important role in a diversified portfolio. In this article we discuss the key aspects of the Satrix ILBI (inflation-linked bond) ETF.


Description

The Satrix ILBI ETF tracks the performance of the S&P South Africa Sovereign Inflation-linked Bond 1+ year Index. This index is a market-value weighted index of South African Rand-denominated inflation-linked securities, which are bonds of which the principal is indexed to the local inflation rate. As such, the security typically guarantees a return above inflation if held to maturity.


Table 1: Characteristics of S&P South Africa Sovereign Inflation-linked Bond 1+ year Index

Source: S&P. Data as at 31 January 2017


Why invest in inflation-linked bonds 

Inflation-linked bonds have unique characteristics that make them valuable to an investor’s portfolio. Firstly, they are designed to help protect investors from the negative impact of inflation – which erodes investors’ purchasing power. This is accomplished by linking the bond’s principal and interest payments to inflation. As such, the investor will receive an annuity stream which is hedged against inflation. Secondly, holding inflation-linked bonds in your portfolio will give you additional diversification benefits, which may mitigate against stock market volatility. This is due to the low correlations it has with other traditional asset classes.


Figure 1: S&P South Africa Sovereign Inflation-linked Bond 1+ year Index yield*


Source: S&P. Data as at 31 December 2016

* Note: this reflects the yield above current inflation that the investor will receive


Risk and return profile of the S&P SA Sovereign Inflation-Linked Bond 1+ year Index and other SA asset classes 

On a returns basis, the S&P SA Sovereign Inflation-Linked Bond 1+ year Index has delivered  around 10% annualised over the last five to ten years. This has come at a significantly lower volatility compared to traditional asset classes such as property, equities and bonds, showing the strong risk-adjusted characteristics of ILBs. While historical returns are not guaranteed to be repeated, this asset class will typically continue to produce inflation-beating returns at below-average risk.


Figure 2: Total returns of the S&P South Africa Sovereign Inflation-linked Bond 1+ year Index

Source: S&P. Data as at 31 December 2016



Figure 3: Historical risk and returns of SA asset classes (10 years)

Source: S&P, Bloomberg. Data as at 31 December 2016


Read more about the new Satrix Property ETF

POSTED : 7 FEBRUARY 2017

Read more in Fund Focus