Ashburton Inflation-X ETF
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Suitability: This fund invests in government-issued bonds that pay interest linked to inflation. Out of the three ETFs that provide exposure to local bonds, Ashburton Inflation-X (formerly RMB) is the only fund that pays dividends to unit holders. The other two alternatives – New Funds Govi and NewFunds ILBI – are total return funds, meaning they automatically reinvest the coupons. RMB Inflation-X therefore suits investors who require consistent income that is protected in real terms.
What it does: The Asbhurton Inflation-X ETF aims to track the performance of the government inflation-linked bond index (GILBx). GILBx is a weighted basket of South African government inflation-linked bonds.
Advantages: The main attraction of bonds as an asset class is their low correlation with stocks. Over the past decade, the JSE’s all bond index has had a lowly correlation factor of 0.13 with the all share index. Because the ETF is inflation protected, the initial amount invested will increase in line with inflation while real distributions are paid out.
Disadvantages: The fund is designed to replicate the performance of the GiLBx and does not make active bets relative to sectors, duration or credit quality. It is also restricted to certain government bonds, thus excluding corporate bonds and other issues by state-owned institutions such as Eskom and Sanral.
Risk: The most common risks associated with fixed-income securities are inflation risk, credit risk and interest rate risk. However, because all of this ETF’s constituents are inflation-linked sovereign bonds issued by the SA government, they do not have inflation risk and credit risk is minimal. Interest rate risk arises from fluctuating interest rates. As interest rates rise, bond prices fall and vice versa. The GILBx index has a high modified duration of 12.3 yearss, so its interest rate sensitivity might be considered to be fairly high. That means the value of the ETF will fall 12.3% for every one percentage point increase in interest rates.
Fees: RMB Inflation-X ETF has a total expense ratio (TER) of 0.45% which is within range of the average of the JSE’s ETF market.
Alternatives: Retail investors seeking exposure to bonds have two other options: NewFunds ILBI and NewFunds Govi, both issued by Absa.
NewFunds ILBI ETF tracks the Barclays Capital/Absa Capital South African government inflation-linked bond total return index of eight RSA inflation-linked bonds. All coupons received are automatically reinvested to provide a total return product. Inflation-linked bonds have an interest rate (coupon) calculated as a function of the inflation rate. The product has an expected TER of 0,28% a year.
NewFunds Govi ETF is also a total return product but tracks the performance of the SA government bond total return index (Govi). This index consists of bonds issued by the South African government, including only those issues in which National Treasury obliges the primary dealers to make a market. The TER of 0,24% a year makes it the cheapest in the category.
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