Your Investment Solutions for Inflation | Xtrackers ETFs

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(*) Source: Eurostat, estimated as at January 07, 2022
(**) Source: EZB, Macroeconomic Projections, Dezember 2021
(***) Source: Quarterly CIO View / Forecasts

What should consumers expect now?

Higher inflation means that purchasing power is weakened: consumers can buy less for their currency than before. The ECB suggests that last year’s increase in the inflation rate in the Eurozone was explained by the following factors:

Oil and energy price rises, particularly after their crash during 2020 following the impact of lockdown measures around the globe;
Supply bottlenecks due to increased demand;
The reversal of the (temporary) VAT cut in Germany^[1]

Purchasing Power of a British Pound Sterling (GBP)

Rising inflation causes the value of a currency to diminish over time. The following graph shows the course of purchasing power of the British pound since 1750. From this, we see that a sum of 100 pounds in 1750 has the same purchasing power as 24,097.49 pounds today^[2]. In other words, one British pound buys less than it used to.

Impact of a rising inflation rate

Factors that have pushed up the annual inflation rate in 2021 show potential to exert sustained upward pressure on consumer prices. Currently it is unclear how long they will persist and to what extent they will affect consumer prices.

Effects of a Rising Inflation Rate for Consumers	Effects of a Rising Inflation Rate for the Economy
Price development: consumer prices rise Cost of living (rent, food and energy) may become more expensive Income and savings lose purchasing power	Price development: profits shrink if input prices and / or wage increases are not passed on to consumers Often coupled with supply bottlenecks and raw material shortage

Inflation: Forecasts and Outlook

The medium-term inflation outlook has rarely been as uncertain as it is now in 2022. This opens up opportunities for investors, but also entails risks. As a market theme for the coming months and years, we believe that inflation risks and opportunities should not be underestimated. From an investment perspective, however, it is important not to overreact to the aforementioned factors, especially if they are only temporary spikes.

Development of the Inflation Rate in the UK

In 2020, the annual inflation rate in the UK was around 0.9 per cent. The following statistics show the average inflation rate in the UK from 1980 to 2020 and forecasts up to 2026.

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Equities: Are these the right asset class for an inflation-resistant portfolio?

In times of low interest rates and negative real returns (returns in excess of the rate of inflation), broadly diversified and long-term investments in equity portfolios could provide potential returns above inflation with the potential for further capital appreciation. Investments in Xtrackers Core ETFs could offer a way to diversify portfolios during rising inflation rates. Investors can choose from a wide range of products, including US, UK or European equities, as well as government bonds or high-yield corporate bonds. By investing in financial assets that benefit from rising inflation, diversification can reduce investment risk. However, the value of the funds can also fall below the price at which the investor purchased the units at any time. This can lead to a partial or total loss of the invested capital.

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Sustainable equity ETFs with ESG Screened criteria

Xtrackers ESG screened equity ETFs which are based on the MSCI Select ESG Screened index family take into account minimum ESG standards^[3]. The ETFs meet the requirements of the EU Sustainable Finance Disclosure Regulation (SFDR) under Article 8 and could offer investors who value sustainable investing a way to build their portfolio with a strategy which aims to mitigate the effects of inflation. Historically, there have also been large differences in the inflation resilience of individual sectors; the MSCI Select ESG Screened approach aims to offer investors potential solutions for this as well.

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Opportunities and risks of investing in Xtrackers Equity ETFs

Opportunities	Risks
Possible price increases Possible dividend payments	Possible price fluctuations / price losses Possible dividend losses

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Inflation-linked bonds: real value preservation instead of nominal returns

A rising inflation rate particularly affects traditional investments in bond ETFs, as they are linked to a fixed, nominal interest yield that is set at the beginning of the term for the bond’s entire maturity. In the event of rising inflation, the interest income continuously loses value and price losses should be expected. Inflation-linked bonds take a different approach. They do not pay a fixed nominal coupon, but a variable interest rate linked to the inflation rate: the higher the price increases, the higher the interest payments (e.g. higher interest on loans).

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Opportunities and Risks of Investing in Xtrackers Bond ETFs

Opportunities	Risks
Regular yields from interest payments Possible price increases as a result of falling market interest rates or rising credit rating	Price losses as a result of rising market interest rates or falling credit rating Capital losses in the event of issuer default