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Inflation-linked bond ETFs: A portfolio diversifier that beats off inflation

by , 29 July 2014

When inflation is high, like it is now, it can be difficult to get returns to beat it.

If you've got money in a savings account, chances are you're losing money as the interest rate you receive doesn't even offset the effects of inflation.

So what can you do? You could look to inflation-linked government bonds. And you can invest in these bonds through an exchange traded fund (ETF).

Read on to uncover your options when it comes to bond ETFs that beat inflation…

These bonds give you protection against inflation

If you’re looking to invest in a bond ETF that beats inflation, you need to turn to one that’s inflation-linked.

These ETFs invest in a number of inflation-linked bonds issued by the South African government.

Investing in bonds has the added benefit of reducing your portfolio’s risk and adding some diversification.

When bonds are inflation-linked, it means you have protection against inflation on your capital amount and the interest payments (or coupons) the bond pays out.

If you invested in Retail Savings Bonds, you receive coupons twice a year. These bond ETFs pay out quarterly coupons.

There are a couple of ETFs on the market at the moment that allow you to invest in inflation-linked bonds.

The advantage of investing in inflation-linked bond ETFs is they hedge you against inflation and you’ll achieve a real yield (a return after inflation).

With the government unlikely to default on these bonds, your savings could do better invested in an inflation-linked ETF rather than a savings account.

Let’s take a closer look at them…

Two inflation-linked bond ETFs to consider

RMB Inflation-X ETF
This fund invests in six different government inflation-linked bonds. If the government releases new bonds, they can be included in the fund. The fund excludes bonds that have less than a year until maturity.

The fund pays out interest on a quarterly basis. The capital investment and interest payments are adjusted for inflation.

This fund also invests in government bonds. The main difference with this ETF compared previous one is that RMB reinvest all interest payments back into the fund.

If you want to invest in an inflation-linked ETF, just speak to your stockbroker.

So there you have it, inflation-linked ETFs, a portfolio diversifier that beats off inflation.

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Inflation-linked bond ETFs: A portfolio diversifier that beats off inflation
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