Inflation can erode the purchasing power of traditional bond portfolios, creating challenges for investors seeking to preserve real returns. Inflation linked bonds (ILBs) may offer a solution with a principal value and, as a result, income, that adjust with inflation. Beyond US Treasury Inflation-Protected Securities (TIPS), global ILB markets offer additional opportunities, particularly in emerging markets where real yields have historically been higher. In this Q&A, we answer frequently asked questions about how ILBs work, how they compare to nominal bonds and, specifically, about the VanEck EM Focus Inflation Bond ETF (EMIL).

• What are inflation-linked bonds (ILBs)?
• How do ILBs work?
• What are the advantages and disadvantages of ILBs versus nominal bonds?
• When will ILBs outperform nominal bonds, and vice versa?
• Why invest in non-US ILBs if the main concern is US inflation?
• Why do emerging markets have higher real yields? Does that imply more risk?
• How have EM ILBs performed versus EM local sovereign nominal bonds?
• How is EMIL’s underlying index designed?
• What role would EMIL play in a global real asset portfolio?
• How can investors buy EMIL?

What are inflation linked bonds (ILBs)?

ILBs are fixed income securities designed to help investors preserve purchasing power. An ILB pays a fixed real coupon, which is applied to a principal amount that adjusts with a measure of local inflation, such as the Consumer Price Index (CPI). As inflation rises, the principal rises with it, so both the coupon payments and the amount repaid at maturity increase.

Governments are the most common issuers, and they often sell ILBs alongside regular, or nominal, bonds. In the US, ILBs are known as Treasury Inflation Protected Securities (TIPS). The ILB market outside the US is even larger than the US TIPS market, encompassing established developed market issuers, such as the UK, France, Germany and Canada, as well as a large segment of emerging market sovereign issuers.

How do ILBs work?

ILBs pay a fixed coupon rate that is applied to an inflation-adjusted principal amount. As inflation rises, both the principal and coupon payments increase.

Consider a simplified example of an ILB with a 3% real coupon and a principal of 100. If inflation is 3%, the principal adjusts from 100 to 103, and the coupon is paid on the new amount (3% of 103 = 3.09). This illustrates how inflation affects an ILB’s principal and coupon payments. In contrast, a nominal bond pays a fixed coupon and returns the original principal, regardless of inflation. In short, an ILB’s principal adjusts with inflation, while a nominal bond’s principal does not. For more on how ILBs work, read A Guide to Inflation Linked Bonds.

What are the advantages and disadvantages of ILBs versus nominal bonds?

Advantages of ILBs

• Real yield is known at purchase (if held to maturity).
• Principal and coupons rise with inflation, helping hedge inflation surprises.
• Pays regular income that grows with inflation, unlike commodities or gold, which pay no income.
• Returns are driven by real yields and realized inflation, which can differ from the drivers of nominal bonds.

Disadvantages of ILBs

• May earn less than nominal bonds if inflation comes in below what the market expected.
• Still sensitive to interest rates: prices fall when real yields rise.
• Adjustments follow a specific inflation index, usually with a lag, and may not match an individual investor’s own cost of living.

When will ILBs outperform nominal bonds, and vice versa?

One of the most important factors in comparing ILBs with nominal bonds is the breakeven inflation rate, or the inflation rate at which an ILB and a nominal bond of the same maturity deliver the same return. It is approximately calculated as the difference between the nominal yield and the real yield. ILBs historically outperform when realized inflation is above the breakeven at purchase, and nominal bonds historically outperform when it is below.

For example, using assumed yields of 10% and 6%, the approximate breakeven inflation rate is 4%. This illustrates the calculation only; it does not predict inflation or bond or Fund performance.

Interest rates matter too. When real yields rise, ILB prices fall, much like a nominal bond. However, if nominal yields rise only because the market expects more inflation, nominal bond prices fall while ILB prices are not directly affected, and realized inflation increases the ILB’s principal. Over a holding period, then, ILBs are driven by changes in real yields and by realized inflation.

Why invest in non-US ILBs if my main concern is US inflation?

Inflation is increasingly a global phenomenon. Supply shocks, commodity price swings, extreme weather and government spending in developed markets affect prices around the world, including in the US. Non-US ILBs offer exposure to those same forces.

The non-US ILB market is significantly larger than the TIPS market, and emerging market governments are among the most committed issuers. Chile, Mexico and Brazil each issue over 40% of their sovereign debt as ILBs, versus about 8% for the US (Source: FTSE, as of June 2026). In addition, food and energy carry a greater weight in EM inflation baskets than in the US CPI, so EM ILB coupons may respond more directly to commodity driven inflation.

Developed market issuers outside the US offer a different kind of benefit. Countries such as the UK, France, Germany, Italy and Canada have well-established ILB markets, and their bonds generally have higher credit quality than EM bonds. They also provide exposure to additional inflation indexes, central banks and currencies, which broadens diversification. The trade-off is that real yields in developed markets outside the US have generally been lower than in EM, and these bonds are also exposed to currency movements against the dollar.

One caution: non-US ILBs adjust to local inflation, not US CPI, and they carry currency risk. They are not a precise hedge for US inflation. TIPS provide a direct link to US inflation, while EM ILBs can provide a higher real-yielding complement that can provide more attractive inflation-adjusted returns in global inflationary environments.

Why do emerging markets bonds have higher real yields? Does that imply more risk?

We see three structural reasons why EM ILBs have historically offered higher yields than developed market counterparts:

• A credibility premium. EM central banks have a shorter record of independent, credible policy than developed market peers, and often keep policy rates higher for longer to protect their currencies and prove their commitment to fighting inflation.
• A higher neutral rate. The “neutral” real rate (known as r*) is generally assumed to be higher in EM, reflecting faster growth, scarcer capital and younger populations.
• A term premium. Greater policy uncertainty and smaller domestic investor bases for government debt call for extra yield.

These factors may support a real yield advantage even when inflation is relatively contained.

Does a higher real yield imply more risk? In part, yes. EM ILBs carry risks that US TIPS generally do not, including currency, political and policy, credit and liquidity risk. Some EM bonds are also rated below investment grade, and because EM ILBs are issued in local currencies, a weaker currency may reduce returns in US dollars. However, developed market ILBs outside the US generally offer lower real yields than EM, but also carry less credit and political risk.

How have EM ILBs performed versus EM local sovereign nominal bonds?

The clearest difference appears when EM currencies weaken because inflation is rising. A weaker currency can push up local inflation, which raises the principal adjustment on an ILB and cushions the impact. That is how bonds are designed to work, but how they have actually behaved historically in the market is a separate question. Between January 2021 and October 2022, EM local currency nominal sovereign bonds declined 26%, while EM ILBs declined 7%.¹

Two caveats apply. First, the two markets are not identical, since not every country that issues nominal bonds also issues ILBs. Second, the benefit is not automatic. When currency weakness comes from other causes, such as capital flight, a political crisis or a global growth shock, EM ILBs have performed much more in line with nominal peers.

How is EMIL’s underlying index designed?

The VanEck EM Focus Inflation Bond ETF (EMIL) seeks to replicate, before fees and expenses, the price and yield performance of the FTSE Emerging Markets Focused International Inflation-Linked Securities Index.

The index is designed to provide diversified exposure to sovereign inflation-linked bonds, with a primary emphasis on emerging markets.

Key features include:

• Emerging markets focus. Inflation linked bonds with fixed rate coupons issued by non-US sovereign issuers, with at least 65% of the index in emerging market issuers.
• Quality. Bonds must be rated CCC or higher, and defaulted issues are excluded.
• Liquidity. Each bond must meet a minimum issue size, set by currency.
• Weighting. Bonds are weighted by market value, with caps on individual issuers (tighter for developed markets than for emerging markets) and on the lowest rated bonds. The methodology is designed to be compatible with US tax rules for regulated funds.
• Rebalancing. The index is rebalanced monthly, on the last weekday of the month.

By combining an emerging market core with a developed market allocation, EMIL seeks to capture the higher real yields in emerging markets while adding higher credit quality and diversification across inflation indexes and currencies.

What role would EMIL play in a global real asset portfolio?

Real asset portfolios often hold gold, commodities, TIPS or real estate. EMIL can play a distinct role alongside them:

• Income. Unlike commodities and gold, ILBs pay regular income that adjusts with inflation.
• Higher real yield. EMIL provides an attractive real yield, driven by EM real yields that have historically been persistently higher than TIPS, and we believe the premium is structural.
• Diversification. EM ILBs have historically had a negative correlation to the US dollar and only a modest to moderate correlation to other inflation sensitive assets such as TIPS, gold and commodities. The developed market portion of EMIL’s index (up to 35%) adds higher credit quality and exposure to additional inflation indexes and currencies.
• Not dependent on high inflation. The real yield premium reflects persistent differences in neutral rates, term premia and institutional credibility, and has been present across a range of inflation environments.

Weigh these benefits against the risks: currency volatility, emerging market risk and the possibility that inflation falls below the breakeven. For investors focused on US inflation, TIPS can remain a core holding, with EM ILBs as a complement rather than a replacement. The right allocation depends on each investor’s goals and risk tolerance, so consider speaking with a financial advisor.