ETF iShares FTSE Gilts UK 0-5 (IGLS)

S

shortbleu

I am a UK resident looking to invest in an asset almost as liquid as cash while keeping a low risk profile and having a better return than cash.

Here in the UK, the best easy access savings accounts have returns of 2.75%.
3-year fixed term bonds can return about 4% but the money needs to be locked away for 3 three years and you cannot access your money during that time.
I am not willing to have my money locked away for more than a couple of months.

I found this tracker from Ishare:
ETF iShares FTSE Gilts UK 0-5 (IGLS)
http://uk.ishares.com/en/rc/funds/IGLS
It is invested in UK government bonds GILTS, so I understand it has a lower risk profile than corporate bonds or equities. As this is an ETF, this is very liquid investment that I could sell back at anytime to get my money back if I need it.

This ETF has averaged about 4% a year and hopefully should continue to outperform cash returns.

Questions:
1) Do you agree that on average and over several years this ETF should outperform the cash?

2) Can you confirm this is very low risk and that I am unlikely to lose more than 5% at any one time?

Thanks
 
1) When you buy this ETF, you're effectively buying a UK govt bond with a particular maturity (equal to the current duration of the relevant index), probably arnd 3yrs. Given the duration of the index, you'll be buying this theoretical bond at a yied of arnd 0.75%. That's, essentially, your annual return, all else being equal. The 4% return you were seeing before was due to the flight-to-quality into gilts, so you should only expect similar performance if you think UK is not OK.

2) Apart from the proper nightmare scenarios, such as where UK's sovereign ratings get slashed and nobody wants to buy gilts (a la Greece), there are a few other dangers. Specifically, if inflation or Bank of England rate or both rise significantly, a flight out of gilts may occur, in which case a large proportion of the historical performance of the index may be unwound.

Hope this helps...
 
Well, this is normally correct... However, we've had a financial crisis in the UK, right? That means a) gilts got very bid; b) banks got screwed. So now, very simplistically, cash (which is, effectively, you lending money to a bank) offers you a higher return than gilts.
 
If you want security, ie the value of your cash can't go down then cash is the only thing to invest in.

Buy an ETF and even though it might pay a yield of 4% there's nothing to stop it dropping 20% over the next year or even few months. Of course the reverse is true, nothing to stop it rising either.

Personally cash is a good investment right now. Yes, it might actually be costing you a touch to hold but if the economies slump some more those with cash might be in very powerful positions........
 
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