Investing in UK government bonds might not be the first thought on investor minds as political uncertainty around Brexit, as well as more general questions about the economy, interest rates, currencies and equity markets, continue. However, they could still be a good choice for investors wanting to de-risk and looking for a safe asset class.
UK government bonds are considered one of the safest bets for investors on the basis the UK government has never reneged on debt owed. It means that during times of political and/or economic uncertainty, gilts typically rally on the basis that the risk of the UK government defaulting is considered to be zero.
The return, although normally positive, is not as big as those found in equities and other more volatile asset classes. Other bonds such as investment grade, high yield corporate bonds, or dividend focused equity products tend to come with more risks, although can produce a higher yield.
Because of this, government bonds are often found in multi-asset portfolios due to characteristics such as lower volatility and often negative correlations with equity markets.
Paul Syms, head of EMEA ETF fixed income product management at Invesco, says: “One of the advantages of developed market Government bonds is they tend to have less credit risk than investment grade corporate or high yield bonds. This means that in a downturn, they are likely to outperform credit markets as investors may have concerns about how the economy will impact corporate borrowers’ ability to repay their debt.
"Government bonds also tend to be more liquid, with larger issues and higher levels of debt outstanding than would be found in credit markets. For Gilts specifically, the average maturity of debt outstanding is longer than other Government bond markets, which means they would have lower refinancing risk than other markets."
Syms adds: “At the moment, UK investors are faced with political uncertainty around Brexit, as well as more general questions about the economy, interest rates, currencies and equity markets. For investors who want to take some risk off the table, or simply diversify their portfolios, UK government bonds may offer an attractive solution.”
In the last year the return on them has varied widely depending on the ETF and has been between 1% and 6%.
One of the largest ETFs (by assets) tracking UK gilts – the iShares Core UK Gilts UCITS ETF – has returned 3.12% over the same time frame.
Some of the factors that can impact UK gilts are the fluctuations in sterling, interest rates, economic growth and inflation. The graph below shows IGLT (in black) and spot GBP (in orange). As sterling falls, gilts tend to rally.
Source: Bloomberg
To this end this year has been good for UK gilt ETFs so far. Most of their 1-year return has been captured in the last six months. There has been even more of a spike in performance as pressure and deadlines around Brexit have come and passed with no resolution.
If you want exposure there are over ten UK gilt ETFs available on the London Stock Exchange with various forms of exposure. For example, while IGLT has returned the iShares UK gilts 0-5yr ETF has returned only 1.18%, so it’s important to know which type of gilt exposure the ETF gives.
The list below contains some of the available ETFs on the London Stock Exchange with the TER and performance over the last year.
RTN
IGLT
IGLS
GLTY
JG15
GLTP
GLT5
VGOV
GILI
GILS
GIL5
GLTL
INXG
GLTS
VGVA
ETF1YRTERINDEXiShares Core UK Gilts UCITS ETF3.12%0.20%The Fund aims to track the performance of the FTSE Actuaries Government Securities UK Gilts All Stock Index.iShares UK Gilts 0-5yr UCITS ETF1.18%0.20%The Fund aims to track the performance of the FTSE UK Conventional Gilts - Up To 5 Years Index.SPDR Bloomberg Barclays UK Gilt UCITS ETF3.77%0.15%The Fund's objective is to track the performance of the UK Government bond Gilt market, as represented by the Bloomberg Barclays Capital UK Gilt Index.JPMorgan BetaBuilders UK Gilt 1-5 YR UCITS ETFn/a0.10%The Fund's objective is to provide exposure to the performance of Pound Sterling-denominated fixed rate UK government bonds with a maturity of between 1-5 yearsInvesco UK Gilts UCITS ETFn/a0.06%The investment objective of the Fund is to deliver the return of the Reference Index, the Bloomberg Barclays Sterling Gilt IndexInvesco UK Gilt 1-5 Year UCITS ETFn/a0.06%The investment objective of the Fund is to deliver the return of the Reference Index, the Bloomberg Barclays UK Gilt 1-5 Years IndexVanguard U.K. Gilt UCITS ETF3.45%0.12%The fund seeks to track the performance of the Bloomberg Barclays Gilts Float Adjusted Total Return Index, a market-weighted index of the U.K. Government fixed-income securities denominated in Pound Sterling.Lyxor Core FTSE Actuaries UK Gilts Inflation-Linked DR UCITS ETF6.0%0.07%The objective of the ETF is to track the evolution of the FTSE Actuaries Bond Indices for British Government Securities Index denominated in British Pounds (GBP)Lyxor Core FTSE Actuaries UK Gilts DR UCITS ETF3.3%0.07%The objective of the ETF is to track the evolution of the FTSE Actuaries UK Conventional Gilts All Stocks Index denominated in British Pounds (GBP)Lyxor Core FTSE Actuaries UK Gilts 0-5Y DR UCITS ETF1.21%0.07%The Fund aims to track the performance of the FTSE Actuaries Govt Securities UK Gilts TR under 5 Yr. Dividend distribution is applicable and dividends will be distributed semi-annuallySPDR Bloomberg Barclays 15+ Year Gilt UCITS ETF4.07%0.15%The Fund's objective is to track the performance of the long-dated UK Government bond Gilt market, as represented by the Bloomberg Barclays UK Gilt 15+ Year IndexiShares GBP Index-Linked Gilts UCITS ETF5.84%0.25%The Fund aims to track the performance of the Bloomberg Barclays UK Government Inflation-Linked Bond Index. The index offers exposure to Sterling denominated inflation-linked bondsSPDR Bloomberg Barclays 1-5 Year Gilt UCITS ETF1.26%0.15%The Fund's objective is to track the performance of the short-dated UK Government bond (Gilt) market, as represented by the Bloomberg Barclays Capital UK Gilt 1-5 Year IndexVanguard U.K. Gilt UCITS ETFn/a0.12%The fund seeks to track the performance of the Bloomberg Barclays Gilts Float Adjusted Total Return Index, a market-weighted index of the U.K. Government fixed-income securities denominated in Pound Sterling.
