This ETF tracks a US-dollar-denominated index with unhedged returns. This means that performance will be constantly affected by foreign-exchange fluctuations whose net effect on returns over the long term is very difficult to predict.
Compared with its Morningstar Category peers--including actively managed funds--the performance record of this ETF on a calendar-year basis looks volatile, and this may be partly explained by specific foreignexchange effects during those isolated periods. However, on an annualised basis and adjusted for risk, the ETF’s cumulative returns have tended to rank in the first quartile or upper areas of the second over fivetrailing year period. This suggests that unfavourable short-term foreign-exchange effects may be ironed out over time.
The Barclays World Government Inflation-Linked Bond Index measures the aggregate performance of the major government inflation-linked bond markets. Issuing sovereigns must have an investment-grade credit rating and a minimum total market size of at least USD 4 billion in inflation-linked bonds. Issuers are statistically weighted by market capitalisation.
The minimum outstanding for individual bonds from eligible sovereigns is set in local-currency terms and is reviewed annually. At the time of inclusion in the index, bonds must have a minimum remaining maturity of one year, be issued in local currency, and be linked to a commonly used domestic inflation index. The only exception is for eurozone issuers, for which eurozone inflation indexes are also acceptable.
The index is calculated using midmarket real prices provided by relevant market makers in each local market ahead of market close. All spot and forward foreign-exchange rates used are official midrates at 4 p.m. London time. The index is rebalanced on the last calendar day of each month. Coupon income received during the month is held in a deposit at one-month Libor (or equivalent) minus 15 basis points and reinvested in the index at rebalancing
The ETF’s ongoing charge of 0.25% is very competitive. Tracking difference is routinely below the ongoing charge, largely as the ETF’s returns are boosted by revenues from the lending of securities. In our view, the lending programme is well-managed and controlled for risk.
This is a market where issuance is biased to long-dated maturities, and this is duly reflected in fairly high duration of this ETF (10-12 years). This would be a drag in performance at times of rising interest rates, something that active funds could address by shortening duration.
Even accounting for this, we take the view this investment strategy in passive form is likely to deliver above-average returns relative to peers in its Morningstar Category over a full market cycle. We award this ETF a Morningstar Analyst Rating of Silver.
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