1. Home
  2. UK Finance Discussions
  3. Gilts and tracker ETFs, etc.

Gilts and tracker ETFs, etc.

I'm trying to plug a few holes in my understanding of index-linked investments and tracker funds etc, in order to understand which ones provide the best hedge against inflation, and which of them cause the greatest losses if you liquidate them early. Can anyone clarify a few points?

With gilts, they generally pay two dividends a year which are linked to the retail price index, and then the capital sum, when repaid is also adjusted in line with the RPI, yes?

What happens if inflation is, say 2% p.a. when one buys the gilt, and

2% at maturity date, but has risen to 30% p.a. some time in-between? Will the capital repayment adjustment take that into account?

Is the RPI an accurate measure of inflation?

If one cashes in the gilt before maturity, say just after receiving the first dividend payment - what does one stand to lose? Is it that they only pay back the original sum, unadjusted, if you cash in before it matures?

Other forms of infaltion-proof (more or less) investments: -

I've read about index-linked ETFs and tracker ETFs, which one can buy into via a stock broker. Am I right in understanding that these always lag behind the index they are tracking, so that in a period of inflation, one isn't really beating inflation at all?

If I invest in one of these, what which be the best index to be tracking?

At the end of the day, which is better, gilts or tracker EFTs?

Is there anything else - something that is almost guaranteed to

*genuinely* beat inflation?

I've considered stocks, but I gather that even the top fund managers fail to beat the index, nine times out of ten, long-term, so the chances of me doing so must be almost nil! (Unless the random walk hypothesis is to be believed, in which case, I am subject to the same odds!)

Thank you for any insights...

JD Email address maintained for newsgroup use only, and not regularly monitored.. Messages sent to it may not be read for several weeks. PLEASE REPLY TO NEWSGROUP!

Reply to
Jake D
Loading thread data ...

There's a management fee, and potentially a tracking error. Because of the fee they're likely to be slightly under the index (but fees can be as low as

0.1%, so not by much). If you want to match the performance of the index they're probably the cheapest way.

Unless there's another category of ETF I don't know about, these are stock market ETFs not indices like RPI. So they track stock market indices like FTSE100, or they can track other benchmarks like commodities. There's not a clear cut correlation between these and inflation, and they're more volatile (and risky) than gilts. But over the long term have performed better.

Apples and oranges.

Index-linked National Savings certificates? Tax-free too.

Theo

Reply to
Theo Markettos

No. Index-linked ones, maybe, but most are not inflation-linked. At maturity date (if there is one) they pay 100 per gilt (the nominal amount).

Rob Graham

Reply to
robgraham

Many thanks for the clarifications. (Likewise to Rob.)

JD

PLEASE REPLY TO NEWSGROUP! (Email address rarely monitored. Messages sent to it may not get read.)

Reply to
Jake D

It is "accurate" insofar as it is correctly calculated according to the rules set out for the index. It may not be relevent to your personal rate of inflation, which will be calculated differently.

You get the market value, which may be more or less than what you paid depending on future expectations on interest rates and inflation rates. At maturity, you get the nominal value back, and you can work out how that compares with what you paid for it.

Reply to
Jonathan Bryce

You can also get index linked bonds from Britannia and Newcastle Building Societies. They pay higher rates than National Savings, but are taxable unless you put them in an ISA.

Reply to
Jonathan Bryce

You don't have to be in anything 'index-linked' to be 'almost guaranteed' to beat inflation.

If you take the currently accepted view that inflation will fall over the coming year, anything index-linked in fact looks poor value.

For example, Leeds are offering a 2 year bond where the annual return is the RPI increase plus 1.8%. If you think inflation will fall from its current level of 5% down even to just 4%, that means the bond will be paying out 5.8% gross. However, you can easily beat that on fixed rate bonds with other UK building societies at the moment. If you're prepared to invest in Anglo-Irish and rely on the Irish government's guarantee on deposits (which is actually better than the UK's) you can get 7.05% gross. With the State Bank of India, you can get up to 7.5% gross.

Reply to
ceres

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.