These index-linked gilts look too expensive

On the face of it, buying index-linked exchange-traded funds to insure against a revival of inflation seems sensible. But this particular fund is too expensive for a number of reasons, says Paul Amery.

On the face of it, buying index-linked exchange-traded funds (ETF) to insure against a revival of inflation seems sensible. After all, the retail prices index (RPI), which index-linked gilts track, is rising at more than 5% a year, way above the Bank of England's base rate of 0.5%. And the consumer price index (CPI) measure of inflation has overshot the Bank's 2% target in 17 of the last 24 months.

But we'd advise against buying the iShares Barclays Capital £ index-linked gilt ETF (LSE: INXG) at current price levels, for four reasons. Firstly, index-linked gilts are only guaranteed to give you an above-inflation return if you hold them to maturity. For shorter-maturity bonds, this may not be a problem. But if you buy longer-dated 'linkers' and half INXG's assets are in bonds with more than 15 years to maturity the price will rise and fall in the interim based on movements in so-called real yields.

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Paul Amery

Paul is a multi-award-winning journalist, currently an editor at New Money Review. He has contributed an array of money titles such as MoneyWeek, Financial Times, Financial News, The Times, Investment and Thomson Reuters. Paul is certified in investment management by CFA UK and he can speak more than five languages including English, French, Russian and Ukrainian. On MoneyWeek, Paul writes about funds such as ETFs and the stock market.