Inflation-linked gilt ETF vs direct gilt ladder
If inflation is your primary worry, UK index-linked gilts (linkers) are the cleanest hedge. The standard ETF wrapper is INXG — convenient, 0.10% OCF, instant diversification. But for pot sizes above ~£100k, buying linkers directly and holding to maturity often wins on cost AND removes the duration risk that ETFs can't avoid. Here's the trade-off in full.
What index-linked gilts are
An index-linked gilt (linker) is a UK government bond whose coupon payments AND principal are uplifted by inflation (currently the RPI index, transitioning to CPIH by 2030 — more on that below). Hold a linker to maturity and you receive your principal back, inflation-adjusted, plus inflation-adjusted coupons along the way.
The key feature: linkers pay real returns. If inflation runs at 4% and the linker's real yield is 1%, you get 5% nominal return. If inflation runs at 0%, you get 1%. Nominal gilts deliver fixed 5% regardless of inflation; linkers deliver inflation + real yield.
Linkers protect against unexpected inflation. They don't protect against unexpected real-yield rises — if real yields rise, linker prices fall (just like nominal gilt prices fall when yields rise).
INXG — the standard wrapper
iShares £ Index-Linked Gilts UCITS (ticker INXG):
- OCF: 0.10%
- Duration: ~22 years (very long; UK linkers have unusually long maturities)
- Number of constituents: ~25 individual gilts
- Domicile: Ireland
- Distribution: Distributing (semi-annual)
- UCITS Reporting Fund: Yes
- Available on: HL, AJ Bell, ii, Fidelity, Vanguard, T212
The fund holds a representative sample of UK linkers, replicating the FTSE Actuaries UK Index-Linked Gilt All Stocks Index. Duration around 22 years is much longer than typical bond ETFs — it means INXG is extraordinarily sensitive to real yield changes.
A direct linker ladder — how it works
Rather than holding INXG, you buy individual linkers via your broker and hold each to maturity. A "ladder" structure typically involves buying linkers maturing in, say, 2030, 2034, 2042, 2048 and 2055 — staggered maturities give predictable cashflow timing.
Example: £100k allocated to a linker ladder might look like:
- £20k in 0&fra14;% Index-Linked Treasury Gilt 2030 (TG30)
- £20k in 1&fra18;% Index-Linked Treasury Gilt 2034 (TR34)
- £20k in 0&fra18;% Index-Linked Treasury Gilt 2042 (TIG42)
- £20k in 0&fra14;% Index-Linked Treasury Gilt 2048 (TIG48)
- £20k in 0&fra18;% Index-Linked Treasury Gilt 2055 (TIG55)
You receive small coupons (currently ~0.1–1.2%) plus the inflation uplift on each gilt. When each gilt matures, you receive the inflation-adjusted principal back; you can either spend it, or reinvest it into a new linker further out the curve.
Cost comparison
On a £100,000 linker allocation:
INXG (ETF) costs over 20 years
- OCF: 0.10% per year on the pot
- Bid-ask spread: ~0.10% one-off on entry, ~0.10% on eventual exit
- Platform fee: 0.15–0.45% depending on platform (worst case £450/year on HL uncapped funds; best case £45/year capped on shares ISA)
- Total annual cost: typically 0.25–0.55% per year on the pot
Direct ladder costs over 20 years
- Dealing fees: ~£11.95 per trade × 5 buys initially + 5 sells at maturity (or reinvest) = ~£120 round-trip on entry + £120 over the years
- Bid-ask spread: ~0.10–0.30% per gilt purchased (linker market is less liquid than gilts; expect wider spreads than ETFs)
- Platform fee: many UK platforms charge ZERO platform fee on directly-held gilts (HL, ii, AJ Bell standard) since gilts aren't "investments" in the percentage-fee sense
- Annual ongoing cost: effectively zero after the one-off purchase costs
On a 20-year horizon with a £100k ladder:
- INXG total cost: ~5% of pot over 20 years on a low-cost platform; ~9% on HL uncapped
- Direct ladder total cost: ~0.5–1.0% of pot over 20 years (purely transaction costs)
The direct ladder saves £4,000–£8,000 over 20 years on a £100k pot — meaningful enough that the extra complexity is often worth it for larger pots.
The hidden trade-off: duration risk
INXG has duration ~22 years. This means a 1% rise in real yields would drop INXG by approximately 22%. Real yields rose roughly 2.5% from 2021 to 2023, and INXG (and other long-duration linker ETFs) fell more than 30% in that period — despite the inflation hedge "working" in the sense that inflation also rose.
A direct ladder eliminates this duration risk for held-to-maturity holdings. If you hold a 2030 linker to maturity, you get the inflation-adjusted principal back regardless of what real yields do in between. The intervening price volatility doesn't matter because you don't sell.
This is the structural advantage of direct ownership over ETFs for fixed income: you can hold to maturity. An ETF can't — it rebalances as bonds approach maturity, replacing them with new bonds. So the ETF is permanently exposed to duration risk in a way that direct ownership isn't.
The RPI-CPIH transition — the elephant in the room
UK linkers currently track RPI (Retail Prices Index), which has historically run 0.5–1.0% per year above CPIH (the Consumer Prices Index including Housing). RPI is being phased out and replaced by CPIH from February 2030.
Implications:
- From Feb 2030, all linker coupons and principal will be uplifted by CPIH, not RPI
- This is effectively a 0.5–1.0% per year benefit reduction for linker holders
- The market has priced this in (linker prices reflect expectations of the change) but the long-end of the curve is most affected
- Linkers maturing BEFORE Feb 2030 (e.g. TG30) will benefit from RPI uplift until they mature; new issuance from 2030 will be CPIH-linked
If you're buying directly, prefer linkers maturing before Feb 2030 to lock in the RPI calculation. Alternatively, accept the CPIH shift on longer-dated linkers; the prices already reflect it so you're not being "cheated".
When direct ownership wins
- Pot size > £50,000: the platform fee saving on direct gilts vs ETF wrappers becomes meaningful
- Specific maturity matching: e.g. "I need £30k in 2032 for my mortgage payoff" — directly own a 2032 linker. No ETF can do this with precision.
- Hold-to-maturity discipline: you commit to not selling early; you accept that the price will fluctuate but you'll get the inflation-adjusted principal at maturity
- Inflation uncertainty hedge: you want pure inflation matching, not duration exposure
When INXG wins
- Pot size < £30,000: the per-trade costs of building a ladder outweigh the ongoing ETF cost
- You don't want the admin: ETF gives you instant exposure with one trade
- You'll add small monthly contributions: dripping into an ETF works; dripping into a ladder doesn't (linker secondary market is thin for small trades)
- You actively want long duration: e.g. as a hedge for an even longer pension liability. INXG's 22-year duration is sometimes a feature, not a bug.
How to actually buy linkers directly
- Open an account with a broker that supports direct gilt purchases: HL (yes, "Bond Market"), AJ Bell (yes), Interactive Investor (yes), iWeb (yes), Vanguard Investor (NO, ETFs only). Trading 212 doesn't offer direct gilts.
- Find the gilt's ISIN: search the DMO website at dmo.gov.uk or your broker's "Bonds" search. Linker ISINs all start with GB00BX (for older issues) or GB00BZ.
- Submit a buy order: most brokers route to wholesale gilt market makers (RBC, NatWest Markets, Barclays). Spread is wider than for shares (typically 0.10–0.50% depending on liquidity).
- Settlement: T+1 typically; the gilt appears in your account next business day.
- Hold to maturity: when the gilt matures, the inflation-adjusted principal arrives as cash in your account.
Hold inside ISA or SIPP: gilt interest is normally taxable, but inside an ISA / SIPP it's tax-free. The inflation uplift on principal is technically a capital gain — but gilts are CGT-exempt, so even outside a wrapper there's no CGT on the inflation uplift.
Worked example — £100k for 7 years
You're 5 years before retirement; you want £100k of inflation-protected income to spend in retirement. Real yield on a 7-year linker is currently +1.5%.
Option A: INXG ETF for 7 years
- Initial cost: 0.10% spread = £100. Buy £100k INXG.
- Annual OCF: 0.10% × pot value = ~£100/yr for 7 years = £700 cumulative
- Platform fee (HL capped): £45/year × 7 = £315
- Total cost: ~£1,115 over 7 years
- Outcome depends on real yields. If real yields stay flat, INXG returns roughly inflation + 1.5% real per year. If real yields rise 1%, INXG drops ~22% in price — you might exit with less inflation-adjusted purchasing power than you started with.
Option B: 7-year linker (e.g. TR34, matures 2034)
- Initial cost: ~0.20% spread = £200. Buy £100k of TR34.
- Annual platform fee: typically £0 on direct gilts
- Coupon: ~1.125% real per year (Index-Linked 1&fra18;% 2034)
- At maturity 2034: you receive £100,000 × (RPI 2034 / RPI today) — full inflation uplift on the principal. Plus 7 years of (small) coupons.
- Total cost: ~£200 one-off
- Outcome is GUARANTEED in real terms: you get back inflation-adjusted principal. No real-yield-rise risk because you hold to maturity.
The ~£900 cost saving over 7 years is small. The certainty of the outcome (direct ladder = guaranteed real principal; INXG = real yield risk) is the bigger feature for this specific use case.
Frequently asked questions
Are linker coupons paid in cash or in additional principal?
Both! Linker coupons are paid as cash, but the coupon RATE applies to the inflation-adjusted principal. So a 1.125% coupon on an inflation-adjusted £110,000 principal pays £1,237.50 in cash twice a year. The principal continues to grow with inflation; you receive cash coupons separately.
Can I buy linkers via Trading 212 or Freetrade?
Trading 212 doesn't offer direct gilt trading; you'd use INXG instead. Freetrade has limited gilt offerings (typically only nominal gilts via the Bond ETFs section). Direct linker access is best on HL, AJ Bell, ii, or Vanguard for the ETF wrapper.
What's the minimum size for a linker direct trade?
Typically £1,000 minimum face value at retail platforms, though some brokers will accept smaller. The bid-ask spread on linkers is wider than on ETFs, so trades under £5,000 see relatively high friction.
Are linkers a hedge against energy bills / food inflation specifically?
Approximately yes — RPI and CPIH track consumer baskets that include energy and food. But linker inflation is calculated with an 8-month lag (RPI for May is used 8 months later); short-term inflation spikes won't immediately show in linker uplift.
What happens to linkers in a deflation scenario?
Most UK linkers issued from 2002 have NO "deflation floor" — if RPI falls, the principal can be reduced. UK linkers ARE structurally exposed to deflation in a way US TIPS aren't (TIPS have a deflation floor at par). In a sustained deflation scenario, linker performance would be worse than nominal gilts. The expected probability is low; the risk is non-zero.
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