The construction of GLADI ILB follows three steps as illustrated in Figure 1:(1) regional weights are assigned based upon the relative GDP share of the respective major regions in the global economy, (2) country weights are assigned to eligible markets that issue ILBs, have a minimum investmentgrade rating, provide sufficient liquidity, and adhere to additional investability considerations, (3) security selection is guided by a set of rules designed to ensure that the index is investable and can be replicated in a portfolio of liquid securities, rather than illiquid instruments that are only theoretically investable.
Step 1. Regional Weights
The regional classification distinguishes the major economic regions listed in Figure 2, with the weight of each region in GLADI ILB determined by its respective share of global GDP. GDP shares are calculated as the simple average of each region’s share of global GDP for the previous five years, measured in nominal U.S. dollars at market exchange rates.
GDP weights are revised annually, with the new weights becoming effective on October 31 of each year. Figure 2 displays the current regional target weights for GLADI ILB, based on the annual review that became effective on October 31, 2011.
Step 2. Country Eligibility and Weights
Within multi-country regions such as Eurozone, Other Industrialized Countries and Emerging Markets, individual countries are further weighted by their share of GDP in each region. To help ensure high quality and investability of the index, countries need to meet a series of eligibility criteria to be included:
Size of Inflation-Linked Bond Market. Eligible countries must have an inflation-linked bond market that exceeds the local currency equivalent
of 7 billion USD.
Credit Quality. Eligible countries must be investment grade (BBB- or higher). The average rating from Moody’s, S&P and Fitch is considered when available. Countries downgraded to below investment grade are removed from the index upon monthly reconstitution.
Investability. The market needs to be investable, i.e. markets with significant capital controls and access restrictions or lack of liquidity are not eligible for the index.
The list of currently qualifying countries and their respective weights are illustrated in Figure 3.
Step 3. Security Selection
Once a country is determined eligible for inclusion in GLADI ILB, security eligibility screens within each country are applied to maximize the replicability and investability of the index.
There are three eligibility criteria that define the universe of instruments. Securities that become ineligible upon monthly reconstitution are excluded from the index.
Instrument Type. Only fixed-rate, non-callable central government debt qualifies. Index inclusion is limited to bonds with a bullet redemption structure whose principal and coupons are linked to the local country or regions consumer price index.
Remaining Maturity. All government bonds must have at least 12 months remaining until maturity.
Minimum Par Amount Outstanding. Eligible instruments must have a current par amount outstanding greater than or equal to a minimum amount that differs by local currency.