Guide to inflation. Protect your portfolio against rising prices

Transcription

1 Guide to Protect your portfolio against rising prices This document is for the exclusive use of investors acting on their own account and categorised either as eligible counterparties or professional clients within the meaning of markets in financial instruments directive 2004/39/ce Guide to May 2017

2 Lyxor Guide to 3 Navigate rising Welcome Inflation has been dormant for years, but that could be set to change. When and where it might rise is hard to predict, but it s better to be prepared. At Lyxor we strive to give you the clearest and most relevant information for you to use with your clients, arming you with all the tools we think you ll need in order to focus on what s important giving advice and making the right investment decisions. In this guide, we ll remind you of some of the basics of what causes, why it matters, and ultimately, what you can do about it. Arnaud Llinas, Global Head of ETFs & Indexing Lyxor Asset Management Welcome 3 What is? 4 How is calculated? 5 Moving with the times 7 Beating is a goal for many portfolios. A rising price environment calls for protection, and investors need to take this seriously. Inflation-linked bonds 8 The -linked bond market 10 The breakeven rate 11 What can you do to protect against? 12 Conclusion 15 Glossary of terms 16

3 Lyxor Guide to 5 What is? How is calculated? In economic terms, is a sustained increase in the price of goods and services over a period of time. Effectively, during ary periods, the same amount of money today would be able to buy less than it would at some point in the future, meaning a single unit of currency is worth less in terms of its purchasing power. There are two types of : demand-pull and cost-push. Demand-pull is when consumer demand exceeds supply, pushing prices upward. It usually takes place during times of healthy economic growth. A number of factors can cause it: Demand pull While measures may vary slightly by country, the approach remains similar across the board: goods and services selected as a proxy for the overall economy are lumped into an basket, the price of which is monitored over time. Suppliers such as supermarkets, service providers, manufacturers and real estate companies are polled by government statistics bureaus, usually on a monthly basis, in order to keep track of the price of this basket. Inflation baskets vary by country CPI HICP RPI Increased levels of government spending, sometimes caused by a lack of fiscal discipline DEMAND SUPPLY Excessive money supply too much money chasing too few goods (often caused by central bank quantitative easing programmes) Rising exports, which lead to currency undervaluation Inflation forecasts that may lead to price increases Higher levels of consumer confidence, leading to more spending and investing, causing companies to then produce more to meet demand. Too many dollars chasing too few goods US CPI-U (Consumer Price Index for all Urban Consumers) Index excludes rural consumers HICP (Harmonised Index of Consumer Prices) ex-tobacco Weighted average of price indices of euro member states Excluded costs: owner-occupied housing and tobacco Retail Price Index (RPI) Housing costs and mortgage payments included (unlike UK CPI) Cost-push is when demand remains steady but wages and/or the cost of natural resources go up, and are often the result of higher production costs. This can be caused by either expected or unexpected events: Unexpected increase in cost of raw materials and commodities such as oil, or sudden halt to production (for example if a factory is destroyed), or industrial action taking place Wage increases for production staff, including higher minimum wages that could push all staff costs upward Sudden changes to laws or government intervention might take place leading to the need to revisit costs If demand is stable and production costs are higher, in order for margins to remain steady, the goods must be priced higher RAW MATERIALS Cost push WAGES IMPORT PRICES Increased production costs passed on to consumers Why you should check the basket While is calculated in similar ways across regions, there can be subtle points to be aware of. A case in point: in the UK, there are two main measures of the Consumer Price Index (CPI) and the Retail Price Index (RPI). Both are calculated on a large, hypothetical basket of everyday goods that includes food, alcohol, tobacco, household items, fuel, clothing, leisure goods and services among other items. The main difference is that RPI includes housing costs such as mortgage interest payments and council tax whereas CPI does not, and therefore CPI is usually lower. The CPI basket calculates core i.e. it represents a normalised increase or decrease over time, rather than short, sharp corrections, such as oil and other commodities. CPI vs. RPI 12 month % change (2) CPI (12 month % change) RPI all items (12 month % change) Souce: ONS website. Quarterly data over period Q to Q

4 Lyxor Guide to 7 Moving with the times Regional differences between indices Issuing country Inflation index Index description/components Indexation lag The basket is often updated to reflect changing tastes, trends and consumer behaviour. United States US CPI-U (Consumer Price Index for All Urban Consumers) Food & beverages, Housing, Apparel, Transportation, Medical care, Recreation, Education & communication, other goods and services United Kingdom Retail Price Index (RPI) Food, Catering, Alcoholic Drink, Tobacco, Housing, Fuel and Light, Household Goods, Household Services, Clothing & Footwear, Personal Goods & Services, Motoring Expenditure, Fares & other travel costs, Leisure Goods, Leisure Services France France CPI ex Tobacco Nondurable goods, semi-durable goods, durable goods, services, and energy. Index excludes tobacco. EU HICP ex Tobacco Food and non-alcoholic beverages, alcoholic beverages, clothing and footwear, housing, water, electricity, gas and other fuels, furnishings, household equipment and routine house maintenance, health, transport, communication, recreation and culture, education, restaurants and hotels, miscellaneous goods and services. Index excludes tobacco. (8 for some earlier issues) Germany EU HICP ex Tobacco (see above) Italy EU HICP ex Tobacco (see above) Sweden Swedish CPI Food and non-alcoholic beverages, alcoholic beverages and tobacco, clothing and footwear, housing, water, electricity, gas and other fuels, furnishing and household goods, health, transport, communication, recreation and culture, education, restaurants and hotels, miscellaneous goods and services. Japan Japan CPI (nationwide, ex-fresh food) Food (excluding fresh food), Housing, Fuel, light and water charges, Furniture and household utensils, Clothes and footwear, Medical care, Transportation and communication, Education, Culture and Recreation, Miscellaneous, and Services. Source: US Bureau of Labor Statistics, UK Office for National Statistics, Federal Reserve Bank of St. Louis, Eurostat, Bundesrepublik Deutschland Finanzagentur GmbH, Statistics Sweden, Statistics Japan. Indexation lag refers to the lag between the publication of index data, and the subsequent indexation of the ILB. Here are some examples of the types of items being brought in or kicked out of the basket last year, due to their current day relevance: In 2016 Lemons Microwaveable rice Coffee pods Leggings Cream liqueur Out 2016 Organic carrots Cooked sliced turkey Prescription lenses CD-ROM Nightclub entry Why does it matter? Inflation plays an important role with central policymakers. For instance, the Bank of England uses to set interest rates, so if the Monetary Policy Committee expects to increase or decrease above or below its target, it might adjust the interest rate in order to try and temper or spur levels of spending or saving. At a more personal level, savings accounts and mortgage interest rates are all affected by and the subsequent effect on interest rates, as are personal incomes, pensions or state benefits. Therefore, introducing a level of protection into your portfolio to avoid the erosion of returns and purchasing power caused by can make sense. Inflation-linked financial products are sometimes known as index-linked, and will be directly tied to a particular index, with regional differences of which to be aware. Unless your net investment returns on your chosen asset are higher than, you will likely end up worse off than when you started. Remember: Which means yields go up... Interest rates tend to follow... And bond prices go down... When rises... However, some ETFs can help mitigate these risks

5 Lyxor Guide to 9 Inflation-linked bonds With fixed income assets, eating into your returns also means your real rate of return becomes less predictable and therefore could be seen as defeating the object of investing in a supposedly safer asset class in the first place. One way around this is to consider -linked bonds (ILBs), also referred to as index-linked bonds or linkers, whose interest and principal payments will rise and fall directly in line with RPI, in the UK, or HICP in Europe, adding a layer of investor protection. ILBs are typically issued by governments in a bid to reduce borrowing costs and reach a wider audience. In some cases like certain emerging markets, they are also a way for governments to address concerns about their ability to keep under control. ILBs are constructed in a similar way to traditional bonds. Both pay out income via a regular coupon, and the principal is repaid at the end of the term, but in the case of -linked bonds, both coupon and principal are adjusted for rising. Therefore, the coupon on the nominal bond will be higher than it would an ILB to compensate the investor for assuming risk, as the market prices the expectation in. Conversely, ILBs pay a lower nominal yield with the expectations discounted by the market to reflect the embedded protection. Bond type Yield type Inflation expectations Realised Nominal Real + expected Priced in -ve price impact Inflation-linked Real + realised Discounted +ve price impact What about deflation? When prices are falling, ILBs from major issuers such as the US, France and Italy tend to provide a floor on the nominal face value of the bond. However, some issuers including the UK do not have such a deflation floor, meaning both the coupon and the principal are at risk. How do -linked bonds work? Let s examine two scenarios. In the first, we look at the illustrative cash flows of a 10 year nominal bond issued at a face value of 100 paying out an annual coupon of 6% with an equivalent 10 year -linked bond with an annual coupon of 4%, in a zero- environment. Illustrative cash flows When ILBs underperform nominal bonds with the same maturity (0% ) Time Nominal bond (6% annual coupon) ILB (4% annual coupon) Y Y1 6 4 Y2 6 4 Y3 6 4 Y4 6 4 Y5 6 4 Y6 6 4 Y7 6 4 Y8 6 4 Y9 6 4 Y Source: Lyxor International Asset Management. For illustrative purposes only. This is not a recommendation % Nominal bond with 6% annual coupon ILB with 4% annual coupon Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 The interest accumulated at maturity would have been 60 for the nominal bond and just 40 for the -linked bond. So in this case, you would have been better off buying a traditional bond, as the potential additional upside of buying an linked bond did not materialise given the zero context. Now let s see what happens if the same two bonds are compared in an environment of rising prices, say with an rate of 2.5%. Illustrative cash flows When ILBs outperform nominal bonds with the same maturity (2.5% ) INFLATION Time Nominal bond (6% annual coupon) ILB (4% annual coupon) Y Y % Y % Y % % Inflation impact Y % Y % 0 Y % Y % Y % Y % Y % Nominal bond with 6% annual coupon ILB with 4% annual coupon Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Source: Lyxor International Asset Management. For illustrative purposes only. This is not a recommendation. This time, it paid off to hold the -linked bond over the nominal one. The ILB s total accrued interest at maturity, including the upward adjustment of principal repayment, totalled 74, while the total for the traditional bond remained at 60. The key thing to remember is that when realised exceeds expected, ILBs should outperform traditional bonds. PRINCIPAL COUPON

6 Lyxor Guide to 11 The -linked bond market The breakeven rate The global -linked bond market is worth more than $3trn 1 and continues to grow. The products have become more popular in an environment where stable sources of income are harder to come by. If you are comparing a fixed rate bond with an -linked bond of similar credit quality and maturity, the difference in the two yields is known as the breakeven rate, and will determine which will deliver a better return. Yield NOMINAL BONDS $3.13tn market value, Dec Difference in yields = breakeven rate INFLATION-LINKED BONDS Maturity e.g. 2.50% 1.00% = 1.50% 10-year US Treasuries TIPS Breakeven For ilustrative purposes only. As traditional asset classes such as equities and bonds can be hard hit by persistent, ILBs can introduce real returns to a portfolio that are exempt from such risk. Furthermore, Societe Generale Cross Asset Research recently observed the correlation between ILBs and other asset classes, such as nominal bonds, credit, cash and alternatives. They came to the conclusion that ILBs can offer attractive diversification benefits. 2 At a time when markets are volatile and correlations between equities and traditional bonds are fairly high, that diversification is welcome. Correlation of linked bonds with other asset classes (2) 70% US UK Euro 60% 50% 40% 30% 20% 10% 0% (10%) (20%) If a conventional 10-year US Treasuries bond is offering a nominal yield of 2.5%, and the 10-year TIPS (Treasury Inflation- Protected Securities) is offering a real yield of 1.0%, the breakeven rate is 1.5%. Put another way, if realised stays below the breakeven rate, the fixed rate bond will outperform the -linked bond. If however it exceeds the breakeven rate, the reverse is true. The clue is in the name; if remained at the breakeven point for the length of the bond to maturity, you would receive (more or less) the same total return on the nominal bond as you would the ILB. The breakeven rate is determined by the market, and is commonly used as an indicator of which way future is headed, on a continual basis, and in real time. Interpreting the breakeven rate The breakeven rate is used to measure the relative attractiveness of ILBs vs. nominal bonds. It is the rate at which investors are indifferent to owning a traditional bond vs. an ILB from the same issuer and with the same maturity. My expected = 3% Preference for ILB INFLATION BREAKEVEN RATE 2% My expected = 1% Preference for nominal bond INVESTOR A INVESTOR B For ilustrative purposes only. This is not a recommendation. 1 Source: Bloomberg. Based on market capitalisation of the Barclays Universal Government Inflation-Linked All Maturities Bond Index, as at 08/12/ Source: The correlation is calculated over a 3-year period using weekly observations of total return indices (euro) and EWMA methodology. For calculating the correlation, 25 financial instruments across various asset classes have been considered. Source: Datastream, Barclays, SG Cross Asset Research/Global Asset Allocation, data from 01/01/05 to 31/08/16. Past performance is not a reliable indicator of future results.

7 Lyxor Guide to 13 What can you do to protect against? While the European -linked bond market may have been around for several decades, there are new products and solutions hitting the market every day. Understanding how and when to use them is key. While central banks have long had control of our fiscal spending, perhaps somewhat absolved from any ary effects, today, with the higher levels of volatility driven by core asset prices such as oil and gas, expectations have become harder to estimate. With active managers finding it harder and harder to beat their respective benchmarks once fees have been accounted for, we believe ETFs are worth considering for mitigating that erosion. Products fall into three categories: When -linked bond ETFs could work If you believe is on the rise, -linked bond ETFs can offer a solid hedge to help you protect your wealth in real terms. The breakeven rate can be a useful barometer to help decide whether to opt for nominal bond ETFs or -linked bond ETFs. If Realised Expected then ILB ETFs should outperform nominal bond ETFs BUT If Realised Expected then ILB ETFs should underperform nominal bond ETFs For ilustrative purposes only. This is not a recommendation. Inflation-linked bond ETFs ETFs that track a basket of linked bonds Coupon and principal are adjusted upwards as rises Offer simple protection Inflation expectations ETFs ETFs that track changes in expectations via a long leg of ILBs and short leg of nominal bonds Strategy aims to offer similar performance to the breakeven rate* Attempts to eliminate interest rate risk Floating rate note ETFs ETFs exposed to a basket of floating rate notes (FRNs) Because rising rates often follow a rise in FRN coupons are adjusted upwards as interest rates rise So if you believe expectations are too low, meaning market participants have potentially understated where is going, linked bond ETFs could make sense. When expectations ETFs might make sense Rising is often accompanied by rising interest rates, as central banks attempt to rein in growth. Interest rate hikes have a negative impact on bond prices, both nominal and -linked. While it is important to note that floating rate note ETFs may not directly protect against, they are designed to mitigate the effects of rising interest rates which may have been caused by rising, therefore are often considered a way of indirectly managing risk. Furthermore, they may be exposed to higher credit risk when the issuer is a corporation rather than a sovereign entity. Choosing which of these will best suit your needs requires a bit of thought as to where you think and interest rates will head. If Interest rates then Bond prices Choosing a potential ETF strategy For ilustrative purposes only. This is not a recommendation. YES NO Do you think will rise? LESS By more or less than what the market expects? MORE NO Do you think interest rates will rise? Nominal bond ETFs Inflation-linked bond ETFs Inflation expectations ETFs This is where expectations ETF can come in handy. They offer a hedge against both rising, and interest rate hikes. The ETFs offered by Lyxor do this through an innovative long/short strategy that keeps the products duration close to zero. Realised Expected If and Rates then Realised Expected BUT If and Rates then Inflation expectations ETFs should outperform ILB ETFs Inflation expectations ETFs sould underperform ILB ETFs For ilustrative purposes only. This is not a recommendation. An alternative strategy YES Floating rate note ETFs For ilustrative purposes only. So if you think expectations are on the rise and are concerned about rising rates, expectations ETF could make sense. Traditional linker ETFs do not offer the added benefit of interest rate protection. *This strategy is a proxy for the breakeven rate; performance may deviate from the true breakeven rate due to market related factors.

8 Lyxor Guide to 15 Conclusion When floating rate note ETFs could help Because rate hikes tend to follow rising, another alternative strategy could be implemented using floating rate note ETFs. Floating rate notes are a type of bond that adjust coupon rates in line with interest rates. As such, floating rate note ETFs can protect against rising rates through higher coupons. For a fixed income investment that offers a degree of predictability, can smooth investment returns over a longer period of time, and keep costs to a minimum, -linked ETFs appear to be an increasingly popular choice. In 2016, -linked ETFs in Europe saw inflows of 3bn, nearly twice the 2015 amount. 1 If Rates then FRN ETFs should protect you through a higher coupon yield Inflation-linked ETF monthly net new assets (EURm) 3,500 e.g. following a rise in For ilustrative purposes only. This is not a recommendation. So if you believe interest rates will go up after a rise in (e.g. central bank reaction), you could protect yourself using floating rate note ETFs. Inflation expectations ETFs making the theory investable* Inflation breakeven The Lyxor long/short ETF strategy 3,000 2,500 2,000 1,500 1, Theoretical measure of expectation Non-investable, yield based measure Driven by the variation in yield between bonds An investable proxy of breakeven (subject to market related factors impacting performance) 100% liquid UCITS compliant strategy Driven by outperformance of linked bonds -1,000 Jan Feb Mar Apr May Source: Lyxor International Asset Management, Bloomberg. Data from 01/01/2013 to 30/12/2016. Past performance is not a reliable indicator of future results. Jun Jul Aug Sep Oct Nov Dec % Yield based index Inflation Expectations X Duration In theory approx. equal Long basket of ILBs Short basket of nominal bonds Price based index 0% ETF performance Against higher expectations and lower yields, with rising cost pressures, active managers are not delivering their promised levels of outperformance as consistently as perhaps investors would like. Morningstar data shows us that on average, only 11% of active fund managers beat the FTSE MTS Eurozone Inflation Linked Bond Index in Not one outperformed that index over 10 years, making the case for -linked ETFs that much stronger. 2 We believe going passive makes sense. From low cost, traditional products to more innovative solutions that track expectations, Lyxor ETF offers a number of related tools designed to navigate rising prices. Percentage of active funds who outperformed the FTSE MTS Eurozone Inflation Linked Bond Index over 10 years 2 * Worth noting, the daily ETF performance will not be exactly equal to the daily change in expectations. The ETF performance is driven by the daily outperformance of the long basket of -linked bonds against the short basket of nominal bonds. This is in theory correlated to changes in expectations, i.e. the breakeven rate. However, other market-related factors, as well as the ETF management fee, can cause some deviation from the actual breakeven rate. 2 Source: Morningstar data from 31/12/05 to 31/08/16.

9 Lyxor Guide to 17 Glossary of terms Bond: Often compared to an IOU, a bond is a debt instrument; the investor lends money to an organisation either a company (corporate bonds) or a government body (government bonds) for a set period of time and usually at a fixed interest rate. That fixed rate of interest will determine the return the investor receives at regular intervals during the investment period, which is known as the coupon, with the amount originally invested returned at the end of the term, or maturity date. Consumer Price Index (CPI): A representative sample of everyday goods and services whose prices are measured at regular intervals to determine whether household costs are going up or down. A commonly used measure of. Core : Core only takes into account the normal rising and falling of prices of everyday goods and services, rather than including assets where prices are more volatile, such as oil or basic materials. Corporate: A company, usually referring to those listed on a public stock exchange Coupon: Named so because in the early days of bond issuance the physical strip was torn off and redeemed by the issuer, the coupon is the periodic payment returned to the investor for the life of the bond. Calculated as total sum of coupons (over a year) / face value of bond = coupon rate (expressed as a percentage) Deflation: The steady decline in the price of goods and services over a cycle Dis: A reduction in the rate of Duration: Not to be confused with maturity. Duration is also expressed in years, but refers to the bond s sensitivity to interest rates. If interest rates move up, bond prices move down because the fixed interest (i.e. fixed at the outset, before the interest rate movement) is now worth less. If interest rates drop, the bond is worth more. The shorter the duration, the less sensitive the bond is to changes in interest rates. Expected : The collective wisdom of thousands of market participants on where they expect rates will head. Interest rates tend to be set based on the expected rate of. If the real interest rate is that set by economic forces, then the nominal interest rate = fixed real interest rate + expected Floating rate note: Bonds with a variable interest rate, or coupon, that is linked to a money market rate, such as Euribor or Libor. Rates will vary in line with the benchmark rate, as frequently as daily or as infrequently as annually. They tend to be favoured when interest rates are expected to rise, introducing a degree of protection. For this reason, they tend to pay a lower coupon than fixed rate bonds. High yield bond: Bonds are classified by the leading ratings agencies (Moody s, Fitch, Standard & Poor s) along a scale of measurement ranking them from AAA (highest credit quality) to D (where it has already defaulted on a payment) The mid line is around the BB (or Ba if Moody s) mark and those above this line are rated investment grade, while those below the line are considered high yield, or junk bonds. Those with a higher credit quality have less likelihood of default but tend to have lower yields. Hyper (where rises very rapidly - higher than 50% in a month and usually follows a war or times of depression. As growth and production prospects fall, people are tempted to hoard basic goods where future prices might rocket, and currencies lose their value dramatically). Inflation breakeven rate: The difference between the yield on a fixed rate bond and an index-linked bond of similar credit quality and maturity. The breakeven rate is a common measure of the market s expectations on. Inflation-linked bond: Also known as index-linked bonds or linkers, these are bonds where their coupon and principal payment are linked to, by tracking against the Consumer Price Index (CPI) or Retail Price Index (RPI) in the case of UK -linked gilts - in order to protect your return against the effects of. Issuer: The company or government you are lending the money to when you take out a bond investment Junk bond: See high yield bond Maturity: The length of time in years from the bond first being issued and the length of time for which the debt contract is in place. These are one, two, three, five, 10, 20 or 25 years typically. You are not obliged to hold your bond investment until it matures, but you run the risk of redeeming at a lower value (see par) than if you hold it to maturity. Not to be confused with duration. Nominal bond: A standard bond, where a fixed rate of interest is paid for a fixed term. Nominal bonds do not offer embedded protection. Nominal return: Par: The gross rate of return, not factoring in any taxes, fees or effects. When a bond is issued and priced, its face value is known as par. However, market forces dictate that when bonds are sold, their value may rise or fall according to demand. Therefore, if they are worth less than face value, they are trading at less than par (i.e. at a discount) or if their value has risen, they are trading at a premium. Purchasing power: The value of a currency defined in terms of the amount of goods and services one can purchase with a single unit of currency. Rising erodes purchasing power over time. Real return: Opposite of nominal return. The actual return the bond investor walks away with after has been factored in. Realised : The actual rate observed over time, unlike expected which is purely speculative. Reflation: Monetary or fiscal policy designed to counter the effects of deflation such as reducing taxes, lowering interest rates, and increasing money supply Retail Price Index (RPI): As with CPI, the Retail Price Index measures the price of a large basket of identical goods and services over time to track price movements and determine changes in the rate of. The main difference is that RPI includes housing costs such as mortgage interest payments and council tax whereas CPI does not. Furthermore, RPI is calculated as an arithmetic mean while CPI is calculated as a geometric mean; as a result, CPI is lower than RPI. Stagflation: Yield: A portmanteau of stagnation and, a depressing combination of low demand, high, and rising levels of unemployment. Bonds deliver more than one yield, depending on the type of security. The coupon is the bond interest rate fixed at point of issue. The current yield is the bond interest rate as a percentage of the price of the bond at that point. In short, yield = coupon amount / price. If price goes up, yield goes down, and vice versa. Yield to maturity: The yield on the bond if it is held for the entire length of the investment to its maturity date. It is expressed as an annual rate of return.

10 Lyxor Guide to pragmatic replication 19 Knowing your risk It is important for potential investors to evaluate the risks described below and in the fund prospectus on our website Capital at risk ETFs are tracking instruments: Their risk profile is similar to a direct investment in the Underlying index. Investors capital is fully at risk and investors may not get back the amount originally invested Replication risk The fund objectives might not be reached due to unexpected events on the underlying markets which will impact the index calculation and the efficient fund replication. Counterparty risk investors are exposed to risks resulting from the use of an OTC swap with Société Générale. In-line with UCITs guidelines, the exposure to Société Générale cannot exceed 10% of the total fund assets. Physically replicated ETFs may have counterparty risk resulting from the use of a securities lending programme. Concentration Risk Smart Beta ETFs select stocks or bonds for their portfolio from the original benchmark index. Where selection rules are extensive it can lead to a more concentrated portfolio where risk is spread over fewer stocks than the original benchmark. Underlying risk The Underlying index of a Lyxor ETF may be complex and volatile. When investing in commodities, the Underlying index is calculated with reference to commodity futures contracts exposing the investor to a liquidity risk linked to costs such as cost of carry and transportation. ETFs exposed to Emerging Markets carry a greater risk of potential loss than investment in Developed Markets as they are exposed to a wide range of unpredictable Emerging Market risks. Currency risk ETFs may be exposed to currency risk if the ETF is denominated in a currency different to that of the Underlying index they are tracking. This means that exchange rate fluctuations could have a negative or positive effect on returns. Liquidity risk Liquidity is provided by registered market-makers on the respective stock exchange where the ETF is listed, including Société Générale. On exchange, liquidity may be limited as a result of a suspension in the underlying market represented by the Underlying index tracked by the ETF; a failure in the systems of one of the relevant stock exchanges, or other market-maker systems; or an abnormal trading situation or event. Important information This communication is exclusively directed and available to Institutional Investors as defined by the 2004/39/EC Directive on markets in financial instruments acting for their own account and categorised as eligible counterparties or professional clients. This communication is not directed at retail clients. This document is issued in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number Some of the funds described in this brochure are sub-funds of either Multi Units Luxembourg or Lyxor Index Fund, being both investment companies with Variable Capital (SICAV) incorporated under Luxembourg Law, listed on the official list of Undertakings for Collective Investment, and have been approved and authorised by the CSSF under Part I of the Luxembourg Law of 17th December 2010 (the 2010 Law ) on Undertakings for Collective Investment in accordance with provisions of the Directive 2009/65/ EC (the 2009 Directive ) and subject to the supervision of the Commission de Surveillance du Secteur Financier (CSSF). Alternatively, some of the funds described in this document are either (i) French FCPs (fonds commun de placement) or (ii) sub-funds of Multi Units France a French SICAV, both the French FCPs and sub-funds of Multi Units France are incorporated under the French Law and approved by the French Autorité des marchés financiers. Each fund complies with the UCITS Directive (2009/65/CE), and has been approved by the French Autorité des marchés financiers. Société Générale and Lyxor AM recommend that investors read carefully the risk factors section of the product s prospectus and Key Investor Information Document (KIID). The prospectus and the KIID are available in French on the website of the AMF ( The prospectus in English and the KIID in the relevant local language (for all the countries referred to, in this document as a country in which a public offer of the product is authorised) are available free of charge on lyxoretf. com or upon request to client-services-etf@ lyxor.com. 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In addition, the shares are not registered under the U.S Securities Act of 1933 and may not be directly or indirectly offered or sold in the United States (including its territories or possessions) or to or for the benefit of a U.S Person (being a United State Person within the meaning of Regulation S under the Securities Act of 1933 of the United States, as amended, and/or any person not included in the definition of Non-United States Person within the meaning of Section 4.7 (a) (1) (iv) of the rules of the U.S. Commodity Futures Trading Commission.). No U.S federal or state securities commission has reviewed or approved this document and more generally any documents with respect to or in connection with the fund. Any representation to the contrary is a criminal offence. This document is of a commercial nature and not of a regulatory nature. 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The obtaining of the tax advantages or treatments defined in this document (as the case may be) depends on each investor s particular tax status, the jurisdiction from which it invests as well as applicable laws. This tax treatment can be modified at any time. We recommend to investors who wish to obtain further information on their tax status that they seek assistance from their tax advisor. The attention of the investor is drawn to the fact that the net asset value stated in this document (as the case may be) cannot be used as a basis for subscriptions and/or redemptions. The market information displayed in this document is based on data at a given moment and may change from time to time. Authorizations: Lyxor International Asset Management (Lyxor AM) is a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2009/65/EC) and AIFM (2011/61/EU) Directives. 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