Inflation ETFs

Inflation ETFs

3 Lyxor ETFs “Inflation Expectations”

Inflation ETFs 3

Lyxor US$ 10Y Inflation Expectations ETF Simple, low cost access to US inflation expectations

*Source: Lyxor International Asset Management. Data as at 27/01/2017.

**Source: Lyxor International Asset Management. Data as at 27/02/2017.

UCITS ETF Bloomberg

Ticker ISIN Listing currency AuM** TER**

Lyxor US$ 10Y Inflation Expectations INFU IM LU1390062831 EUR, USD, GBP $530m 0.25%

Big

$552m in

Assets under

Management*

Competitive

Total Expense

Ratio of just

0.25%*

Innovative

Access to

inflation

expectations

with no interest

rate risk

INDEX*

Index name

Markit iBoxx USD

Breakeven 10-Year Inflation

Index Nominal_TRI

Bloomberg ticker IBXXUBF1

Currency USD

# components 14

Yield -0.41%

Duration 0.24

(long leg: ~8)

Unique

The 1st and only

US inflation

expectations

ETF on the

Market*

Inflation ETFs 4

Lyxor EUR 2-10Y Inflation Expectations ETF Simple, low cost access to European inflation expectations

*Source: Lyxor International Asset Management. Data as at 27/01/2017.

**Source: Lyxor International Asset Management. Data as at 27/02/2017.

UCITS ETF Bloomberg

Ticker ISIN Listing currency AuM** TER**

Lyxor EUR 2-10Y Inflation Expectations INFL FP LU1390062245 EUR, GBP €314m 0.25%

Big

$267m in

Assets under

Management*

Competitive

Total Expense

Ratio of just

0.25%*

INDEX*

Index name

Markit iBoxx EUR

Breakeven Euro-Inflation

France & Germany Index

Nominal_TRI

Bloomberg ticker IBXXEBF1

Currency EUR

# components 18

Yield -0.73%

Duration -0.06

(long leg: ~5)

Unique

The 1st and only

Euro inflation

expectations

ETF on the

Market*

Innovative

Access to

inflation

expectations

with no interest

rate risk

Inflation ETFs 5

Lyxor UK£ 10Y Inflation Expectations ETF Simple, low cost access to UK£ inflation expectations

Coming soon

Inflation ETFs

ETFs as Risk Management tools

Inflation ETFs 7

ETF: from “Market Access” to “Risk Management”

INTEREST RATE RISK

Etf Short on BTP, BUND & US Treasury

Etf on Floating Rate Bond (EUR)

CURRENCY RISK

Etf Euro Hedged on Equity (S&P 500, Topix, JPX-400, Msci World, Ftse 100, ecc…)

Etf Euro Hedged on Bonds (US Corp IG, US High Yield, US Treasury, Emerging ecc…)

MARKET RISK

Etf Short on Ftse Mib, Dax, Euro Stoxx 50, ecc…

LIQUIDITY RISK

Etf on Smart Cash €, Smart Cash $, Euro Cash Eonia, Fed Fund $

RATING RISK (default)

Etf on € High Yield rating “BB” only

Etf on Bond Ex-Financials

INFLATION RISK

Etf on Inflation Linked Bond (USD, EUR & GBP)

Etf on Inflation Expectations (USD, EUR & GBP)

Inflation ETFs

Inflation Risk

Inflation ETFs 9

Inflation concerns are on the rise Global sentiment has changed from the deflation fears of 2015

► SG Cross Asset Research expects inflation prints to inch higher over the next quarters, supported by the base

effect from oil price normalisation finally kicking in.

Inflation ↑

Deflation

*Source: SG Cross Asset Research, ‘The Virtues of Inflation-linked bonds’, 14/10/2016. Past performance is not a reliable indicator of future performance.

The figures relating to future performance are a forecast and are not a reliable indicator of future results.

Inflation prints to crawl higher over the next quarters*

Inflation ETFs 10

Inflation reduces purchasing power

$ $

$

$ $

$

$ $

$ $

+2% inflation

+5% nominal portfolio return

+3% real return

- =

► Predicting inflation is hard, but it’s better to be prepared...

Inflation ETFs 11

When inflation rises, interest rates usually follow... ...and rising rates erode bond returns

► Rising inflation tends to result in rising rates as central banks attempt to reign in growth

► Interest rate hikes have a negative impact on bonds, both nominal and inflation-linked

► Some ETFs can help manage this risk...

For illustrative purposes only.

THEN Interest

rates

Bond

prices IF

Inflation ETFs 12

Inflation is historically correlated to rates Correlation has broken down, but may re-appear when rates go back up

► With the end of zero rate policy, the correlation between short term interest rates and inflation could re-appear

Source: Lyxor ETF Research, Bloomberg. Data period 28/02/1970-08/12/2016. Past performance is not a reliable indicator of future returns.

Year-on-year US CPI vs. Fed Fund rate

The story in

Europe is similar...

Inflation ETFs

Inflation Expectations ETFs Hedge against both rising inflation and rising rates

Inflation ETFs 14

Inflation Expectations Determined by the market’s expectations of future inflation

For illustrative purposes only.

► Just like conventional bonds, ILBs are issued with a certain face value

► When traded in the market, their price varies depending on the market’s expectations of future inflation

► The difference in spread between ILBs and nominal bonds with the same maturity is the breakeven inflation rate

Difference in yields

= breakeven rate

NOMINAL BONDS

INFLATION-LINKED BONDS

Yield

Maturity

e.g. 2.50% – 1.00% = 1.50% 10-year US Treasuries TIPS breakeven

Inflation ETFs 15

How does the ETF work? A simple long/short strategy

Index holdings Exposure

Exposure to

inflation

expectations

Long a diversified

basket of recently

issued inflation-

linked bonds

Short traditional

bonds matched for

duration

Isolate inflation.

Helps to maintain

hedging ability

when rates rise

Interest

rates

Interest

rates

Inflation-linked Bonds

e.g. TIPS

Traditional Bonds

e.g. Treasuries

Expected

inflation

Target duration = zero

Inflation ETFs

16

Index construction

1) TIPS constituents are determined as follows:

The weight of the “on the run” TIPS (i.e. last one issued) is fixed at 28%

at each rebalance date.

The remaining five “off the run” TIPS (i.e. next available issues) are

weighted based on age, using an exponential decay and a maximum

weight cap of 28%, with the newest bond having the largest weight.

2) Each TIPS is associated with two (or single) neighboring Treasuries

with closest annual modified duration with the weight of the two (or

single) treasuries determined in a way to neutralize duration.

3) Exposure to any TIPS and to any Treasury bond cannot exceed 30%

at any rebalance date. In addition, Markit iBoxx USD 10-year

Breakeven Inflation Index must contain a total of six TIPS and at least

six Treasury bonds, at any point in time.

A long position in the last

6 U.S. 10-year Treasury

Inflation-Protected

securities (TIPS) issued

Markit iBoxx USD 10-year

Breakeven Inflation Index

A short position in U.S.

Treasury bonds with

adjacent durations

The base inflation index for the TIPS is US CPI

A combination of:

» Key figures of Markit iBoxx USD 10-year Breakeven Inflation INDEX1

Long leg

Markit iBoxx USD 10-Year TIPS

Index

Short leg

Markit iBoxx USD 10-Year

Treasuries Index

1Source Lyxor International Asset

Management. Data observed as of

May, 2016

Index type Total return

Rebalancing frequency Monthly

Index currency USD

Index Bloomberg Ticker IBXXUBF1

ISIN GB00BYVXD172

Duration (Years) 0.07

Modified Duration 0.11

Long leg Maturity 8.96

Number of bonds in the Index 14

Lyxor US$ 10Y Inflation Expectations ETF Index Construction

Inflation ETFs

17

A combination of:

Key figures for Markit iBoxx EUR Breakeven Euro-Inflation France & Germany Index

Long leg Markit iBoxx EUR Breakeven Euro-Inflation

France & Germany Inflation-Linked Index

Short leg Markit iBoxx EUR Breakeven Euro-Inflation

France & Germany Sovereign Index

Markit iBoxx EUR Breakeven Euro-

Inflation France & Germany Index

A long position in

Inflation-linked Bonds

(ILB) issued in priority by

France and Germany

A short position in France

and Germany sovereign

bonds with adjacent

durations

The base inflation index for the TIPS is Euro CPI

Index construction

1) ILB constituents are determined as follows:

Selection of six inflation-linked sovereign bonds issued in priority by

France and Germany, with a minimum investment grade rating, a

minimum outstanding amount of EUR 5 billion and with a maturity

between 2 and 10 years. The inflation-linked bonds are market value

weighted.

2) The nominal sovereign bond position is constructed in a way that

duration of the inflation-linked bonds portion is neutralized.

3) Exposure to any inflation-linked bond and to any nominal sovereign

bond cannot exceed 30% at any rebalance date. In addition, the Index

must contain at least six inflation-linked bonds and at least six nominal

sovereign bonds, at any point in time.

1Source Lyxor International

Asset Management. Data

observed as of May, 2016

Index type Total return

Rebalancing frequency Monthly

Index currency EUR

Index Bloomberg Ticker IBXXEBF1

ISIN GB00BYVXCZ47

Duration (Years) -0.02

Modified Duration 0.02

Long leg Maturity 4.87

Number of bonds in the Index 14

Lyxor EUR 2-10Y Inflation Expectations ETF Index Construction

Inflation ETFs 18

Key Takeway

ETF “INFLATION EXPECTATIONS” ≠ ETF “INFLATION LINKED BONDS”

PROTECTION AGAINST “INFLATION” RISING

PROTECTION AGAINST “RATE” RISING

ETF IS EXPOSED TO INFLATION EXPECTATIONS MOVES ONLY

Alias to “Breakeven Inflation” changes

NO EXPOSURE TO INTEREST RATE RISK (Modified Duration ~ 0)

While Inflation Linked Bond are exposed

Inflation ETFs 19

How does the strategy behave? Comparison with traditional bonds and ILBs

Rise in expected

inflation

Traditional

bond

Rise in nominal

interest rates

Inflation-linked

bond

Breakeven

strategy

=/- + +

- - =

+ Positive effect

= No effect

- Negative effect

Source: Lyxor International Asset Management. For illustrative purposes only.

Rising inflation expectations can mean higher interest rates, in which case traditional bonds & ILBs would fall in value.

► The inflation expectations strategy provides exposure to the inflation driven outperformance of ILBs

+ protection against rising interest rates

► The combined effect of both rising expected inflation and interest rates can be summarised below:

Inflation ETFs

How to use the ETF

Inflation ETFs 21

How to use the ETF

USED AS INFLATION HEDGE FOR A BOND PORTFOLIO

ETF used as an overlay of an existing Nominal Bond Portfolio

USED FOR DIVERSIFICATION OF A BOND PORTFOLIO

ETF as access to the asset class “Inflation” expectation

USED FOR DURATION MANAGEMENT

Within an Inflation Linked Bond portfolio (ETF Mod. Duration ~ 0)

Inflation ETFs 22

Diversification approach ILBs have low correlation with other assets

*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.

**See appendix for full list of asset classes used in correlation analysis.

► SG Research recently observed

the correlation between ILBs

and other assets*

► 25 asset classes were used in

the analysis (e.g. equities,

nominal bonds, credit, cash,

alternatives**)

► Conclusion ILBs have

strong diversification

properties

Correlation of inflation-linked bonds with other asset classes*

Inflation ETFs 23

Tactical approach Have markets fully priced in European inflation

► Equally, European inflation expectations may also be underpriced by the market

European inflation expectations – SG forecast vs. market expectations

Source: Bloomberg, SG Cross Asset Research/Economics; market expectations for euro area HICP ex tobacco; Bloomberg quarterly estimates for HICP

% yoy. Data as at 06/01/2017. Past performance is not a reliable indicator of future performance. The figures relating to future performance are a

forecast and are not a reliable indicator of future results.

► SG Research

believes inflation

expectations

aren’t priced in

Inflation ETFs 24

Inflation Hedging approach

INDICATIVE RULE

Duration of the client’s Nominal portfolio to be hedged

____________________________________________

Duration of the Breakeven ETF

You can hedge against Inflation even a Portfolio of Corporate Bond

(not possible with traditional Inflation Linked Bond)

Inflation ETFs

ETF sensitivity to inflation

expectations

Inflation ETFs 26

Inflation expectations ETFs - theory vs. reality Making the theory investable

► Inflation breakeven

Theoretical measure of inflation

expectation

Non-investable, yield based measure

Driven by the variation in yield

between bonds

► The Lyxor long/short ETF strategy

An investable proxy of breakeven

inflation (subject to market related

factors impacting performance)

100% liquid UCITS compliant strategy

Driven by outperformance of inflation

linked bonds

%

Yield based index Price based index

Long basket

of ILBs

Short basket

of nominal

bonds

∆ Inflation Expectations x Duration ≈ ∆ ETF performance

APPROX. EQUAL

(IN THEORY)

Inflation ETFs 27

Simply a proxy of inflation breakeven The ETF strategy is not a direct replication of the breakeven rate

► For the avoidance of doubt

Daily ETF performance is not exactly equal to daily change in inflation expectations

ETF performance is driven by the daily outperformance of the long basket of ILBs vs. the short basket

of nominal bonds

This is in theory correlated to changes in inflation expected by the market (i.e. the breakeven rate)

Change in inflation expectations x Duration of long leg basket ≈ approximate change in ETF

► Relationship between duration and breakeven an illustrative example

An approximate calculation for how the ETF should theoretically move in relation to breakeven inflation is:

US Inflation Breakeven rate Markit iBoxx US 10Y Breakeven Index

Yield based index Price based index

Long

basket

Short

basket

+0.4% Duration = 8.7* +3.5% X ≈

*Sensitivity can vary based on other market related factors. See next slide for details.

Inflation ETFs

28

Source : Bloomberg, Markit, 2016

U.S. Inflation Breakeven Markit Iboxx US 10Y Breakeven Index

1. Sensitivity as of May, 2016. Sensitivity can vary.

*Data observed March 2007 to March 2016. Past performance is not a reliable indicator of future returns.

»Movements in the Breakeven rate are approximately multiplied in the ETF by the duration of the index basket

X81 0.42%

»3.3%

» An approximate calculation for how the ETF should move in relation to breakeven inflation is;

Change in inflation expectations [0.42%] x Duration of ETF basket [8 years] = approximate change in ETF [3.3%]

»However, as a real investment, the ETF is also sensitive to market related factors such as inflation seasonality and

liquidity premiums in the short term, which can effect the sensitivity of the index to breakeven inflation.

Inflation ETFs

► Variation between ETF performance and breakeven rate can be explained by variable market related factors

29

Sensitivity to market related factors Duration is the biggest factor but other factors exist

*Source: Bloomberg. Data observed March 2007 to March 2016. Past performance is not a reliable indicator of future returns

Liquidity premiums

Liquidity

premiums on

the inflation-linked

bond market can

also affect pricing

5-10x Average historically

observed sensitivity range of

the Markit iboxx Breakeven

index to a change in inflation

breakeven rate*

Duration

US breakeven has a

10 year duration

whereas the long and

short position of the

product are 8.7 years

due to the diverse

nature of holdings

Seasonality

Inflation rates can

vary significantly

throughout the year.

Inflation-linked bond

performance can

change depend on

entry / exit timing

Inflation ETFs

ETF vs Breakeven rate

Inflation ETFs 31

Does the ETF track the breakeven rate of inflation as

displayed on Bloomberg (*)?

(*) USGGBE10 for the US, FRGGBE10 for France, GEGGBE10 for Germany

The Bloomberg “breakeven rate” is a calculated indicator and not a quoted instrument price. It is

calculated by Bloomberg simply as the differential between the 10Y nominal bond rate and the 10Y

inflation-linked 10Y rates.

By contrast, our product provides exposure to a live portfolio (not to calculated indicator)

which is long in a diversified basket of inflation-linked securities and short in a diversified

basket of nominal treasury securities, with all the characteristics and the implementation

constraints of a live portfolio e.g.:

- duration of the baskets (long and short), which is significantly different from the Bloomberg

breakeven duration,

- cost of financing the short position (which is not discounted in the Bloomberg breakeven

calculation),

- liquidity and associated bid-offer spreads of the portfolio components (that are different from the

single-bond , on-the-run 10Y Bloomberg breakeven pricing conditions),

- volatility of prices on CPI announcement dates that can differ from one instrument to another,

- bid-offer costs associated with rebalancing monthly the index, which do not reflect in the

Bloomberg breakeven performance

Inflation ETFs

► Example: 10Y USD Inflation Breakeven index has shown high correlation with the breakeven rate

► There is no theoretical inflation breakeven for the European product

32

Historical performance is highly correlated Track record of underlying index vs. breakeven rate

Correlation coefficient: 0.96

Source: Lyxor International Asset Management. Data as at April 2016. Past performance is not a reliable indicator of future returns.

Inflation ETFs

ETF Inflation Expectation

vs

ETF Inflation Linked Bond

Inflation ETFs 34

Which ETF strategies can help? Three ways to play inflation

Inflation-linked bond ETFs Inflation expectations ETFs Floating rate note ETFs

► ETFs track a basket of

inflation-linked bonds

► Coupon and principal

adjusted upwards as

inflation rises

► Offer simple inflation

protection

► ETFs track changes in

inflation expectations via

long leg of ILBs and short leg

of nominal bonds

► Strategy aims to offer similar

performance to the inflation

breakeven rate, an indicator

of inflation expectations*

► Attempts to eliminate

interest rate risk

► ETFs exposed to a basket of

floating rate notes (FRNs)

► Why? Because rising rates

often follow a rise in inflation

► FRN coupons are adjusted

upwards as interest rates

rise

*This strategy is a proxy for inflation breakeven rate; performance will generally deviate from the true breakeven rate.

Inflation ETFs 35

Riding the different waves ETF strategies fit for purpose

► The performance of each ETF strategy will depend on the exposure – or ‘wave’ – you wish to capture

Expected inflation wave (minus interest rate risk) Expected inflation wave Rising rates wave

Interest

rate risk Interest

rate risk

Credit

risk

Inflation linked bond ETFs Floating rate note ETFs Inflation expectations ETFs

*TER = Total Expense Ratio of the ETF.

Inflation ETFs 36

When to use inflation expectations ETFs? If you believe both inflation expectations and interest rates will rise

Dual protection from rising inflation and rising rates

► Inflation expectations ETFs can hedge against both rising inflation expectations and rate hikes

When could inflation expectations ETFs be used?

► If you think inflation expectations are too low and are concerned that interest rates will rise

IF THEN Realised

inflation

Expected

inflation

Inflation expectations

ETFs should

outperform

ILB ETFs

Inflation expectations

ETFs should

underperform

ILB ETFs

BUT

For illustrative purposes only. This is not a recommendation.

AND

THEN

Rates

IF Realised

inflation

Expected

inflation AND Rates

Inflation ETFs 37

Choosing a potential inflation ETF strategy It depends on your view on inflation and interest rates

By more or

less than

what the

market

expects?

Nominal

bonds

NO

YES

Do you think

interest

rates will

rise?

Inflation-linked

bonds

Inflation

expectations

YES

NO

Do you

think

inflation

will rise?

LESS

MORE

Floating rate

notes

For illustrative purposes only. This is not a recommendation.

An alternative inflation strategy

Inflation ETFs

Important information

38

Key risks of Lyxor ETFs

It is important for potential investors to evaluate the risks described below and in

the fund prospectus which can be found on www.lyxoretf.com

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 Societe

Generale. In-line with UCITS guidelines, the exposure to Societe Generale cannot

exceed 10% of the total fund assets. Physically replicated ETFs may have

counterparty risk resulting from the use of a Securities Lending Programme.

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 Societe Generale. 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, Societe Generale or other market-maker systems; or an

abnormal trading situation or event.

Inflation ETFs

Important information

39

Disclaimer

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 435658. Some of the funds described in this brochure are investment

companies with Variable Capital (SICAV) incorporated under Luxembourg Law, listed on the

official list of Undertakings for Collective Investment, authorised 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

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and have been approved by the CSSF.Some of the funds described in this document are

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approved by the French Autorité des marchés financiers.Société Générale and Lyxor AM

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Générale is a French credit institution (bank) authorised by the Autorité de contrôle

prudentiel et de résolution (the French Prudential Control Authority.

Inflation ETFs

Thank you

www.ETF.it

Marcello CHELLI ; Head Italy ; tel. +39 02 89.63.25.28 ; marcello.chelli@sgcib.com

Ilaria PISANI ; Institutional Sales ; tel. +39 02 89.63.25.83 ; ilaria.pisani@sgcib.com

Chiara MAINI ; Marketing & CRM ; tel. +39 02 89.63.25.23 ; chiara.maini@sgcib.com