Analyse: Lyxor ETF Euro Cash

The appeal of this ETF as a cash management instrument is enhanced by its daily real-time tradability, generally at lower costs than traditional money market funds. This could make this ETF a useful tool for institutional investors with an active need to financially optimise the use of cash holdings. Meanwhile, for retail investors, a key appeal of this ETF is likely to be as an alternative to bank deposits. In general, retail investors are likely to consider money market ETFs on longer-time horizons than institutional investors.

Fundamentale Analyse
The Eurozone’s economic performance progressively deteriorated through 2012, with falls in output recorded from Q2 to year-end. Expectations for 2013 are for a fairly modest performance – clearly below that of the US and emerging markets – as Eurozone economies remain committed to austerity policies. Although the slowdown is general to all Eurozone national economies, there remains a clear performance gap between the export-oriented Northern economies and the private-demand-dependant Periphery, with the latter espousing high unemployment rates. And yet, despite not a particularly bright general outlook, the fact is that perceptions about the Euro have changed for the better since the European Central Bank (ECB) verbalised an unequivocal commitment to ensuring its survival.

The Eurozone has experienced a distinct lack of inflationary pressures since the start of the economic crisis. This has allowed the ECB to keep a very accommodative policy stance, with interest rates at historical low levels since May 2009 to date, bar a short-lived period in 2011. The deterioration of economic conditions in 2012 – not to mention the damaging effects of the Eurozone sovereign debt crisis – led the ECB to bring rates further down in July 2012, with the refi rate cut to 0.75% and the deposit rate to 0.00%. These levels remain in place as of this writing. Expectations are for very loose monetary settings to remain in place for the foreseeable future, not least as inflation expectations remain in check with the ECB’s price stability target of an HICP rate of around 2.0% y/y.

Relevant money market rates have broadly tracked the movements in ECB interest rates. EONIA went down from an average of close to 3.9% in 2008 to 0.71% in 2009 and further down to 0.44% in 2010. It picked up to 0.87% in 2011 to reflect the effects of the ECB’s short-lived tightening cycle. However, EONIA resumed a clear downward trend into 2012, finishing the year at an average of 0.23%.

Aside from conventional monetary policy measures, the ECB remains focused on the issue of financial stability by routinely providing ample liquidity at very favourable terms to the Eurozone banking sector. The impairment of interbank lending channels since the start of the crisis has had a direct effect on EONIA. Before the crisis, EONIA used to track the ECB’s main refi rate. However, with interbank lending frozen, commercial banks have been parking their cash en masse with the ECB. As a result, EONIA now tracks the much lower ECB deposit rate, currently at 0.00%, with obvious consequences on the performance of any EONIA-tracking financial instrument.

The lowering of the ECB deposit rate to 0.00% was seen as move from to kick-start the interbank lending market. Meanwhile, the improvement of perceptions vis-à-vis the Euro has also produced some positive developments (e.g. commercial banks becoming less reliant on ECB funding). However, full resumption of normal lending practices still remains a somewhat distant prospect. As such, EONIA is likely to continue tracking the ECB’s deposit rate for the foreseeable future.

Indexkonstruktion
The EuroMTS EONIA Investible index measures the total return of a rolling deposit invested daily at EONIA (i.e. the overnight reference rate for the Euro computed as a weighted average of all overnight unsecured lending transactions undertaken in the banking system) and settled on a T+3 period basis. The EuroMTS EONIA Investible index has been specifically designed as a benchmark for investors seeking an exposure to EONIA through exchange traded instruments and closely tracks the EuroMTS EONIA Index, which is calculated using a T settlement period. EuroMTS EONIA indices are calculated daily on a total return basis with price fixings of 09:00 CET. EONIA is sponsored by the European Banking Federation (EBF), which represents the interest of some 5000 European banks, and by the Financial Markets Association (ACI). EONIA is computed with the help of the European Central Bank (ECB). The banks contributing to EONIA are the banks with the highest volume in the Eurozone money markets. The panel of banks contributing to EONIA currently consists of 49 banks. Since its launch in January 1999, EONIA has become the underlying rate of numerous financial derivatives.

Fondskonstruktion
Lyxor uses synthetic replication to track the EuroMTS EONIA Investible index. This ETF was launched in September 2007 and is domiciled in France. Lyxor uses the unfunded swap model. The ETF buys a basket of securities (ie. substitute basket) from Societe Generale while simultaneously entering into an OTC total return swap agreement to receive the performance of the benchmark index of reference (net of fees) in exchange for that of the substitute basket. The substitute basket is generally made up of a basket of EUR-denominated fixed income securities, both government-backed (e.g. sovereign, regional, agency) and corporate. A snapshot of the fund’s basket as of writing (e.g. early February 2013) showed that Eurozone sovereign and quasi-government bonds accounted for some 55% of the basket, while 35% were covered asset-backed (e.g. covered) bonds and the remaining 10% corporate bonds. According to UCITS regulations, individual counterparty risk exposure is limited to 10% of the fund’s NAV at any point in time. According to our research, the OTC swap is not collateralised, which effectively exposes the investor to a loss of up to 10% of the NAV if the swap counterparty defaults. However, Lyxor is now committed to target zero swap exposure on a daily basis and is also considering the virtues of adopting an overcollateralised structure. Lyxor does not currently engage in securities lending, which helps to minimise overall counterparty risk. The Lyxor EuroMTS Euro Cash ETF does not distribute dividends.

Gebühren
The annual total expense ratio (TER) for this ETF is 0.15%. This is the top-end of the 0.10-0.15% TER range for Eurozone money market ETFs. Additional costs potentially borne by investors and not included in the TER include bid/offer spreads and brokerage fees when buy/sell orders are placed for ETF shares.

Alternativen
Most European ETF providers offer products providing exposure to the Eurozone money market. Although there is no uniform definition as to what best represents its essence, the majority of ETFs marketed opt to track indices reflecting the return of deposits invested in EONIA. In terms of assets under management (AUM), the Lyxor Euro Cash ETF is second to the db x-trackers EONIA TRI 1C / 2C ETF, also swap-based and charging a TER of 0.15%. Other alternatives providing similar exposure, but lagging substantially in AUM terms, are Comstage EONIA ETF (TER 0.10%), Amundi EONIA ETF (TER 0.14%) and Credit Suisse EONIA ETF (TER 0.14%).

The PIMCO Source Euro Enhanced Short Maturity Source ETF is an actively managed ETF aimed at outperforming EONIA by investing in a higher-yielding mix of corporate and government bonds with short maturity. The price for active management comes in the shape of a TER of 0.35%.

Investors looking for alternative ways of measuring the performance of the Eurozone money market may consider the iShares eb.rexx Germany Money Market ETF (TER 0.12%). This physically-replicated fund tracks an index measuring the performance of German government bonds with very short residual maturity. Following the same strategy we find ETFlab’s Deutsche Boerse EUROGOV Germany Money Market ETF (TER 0.12%). Meanwhile, the Amundi Cash 3M EuroMTS Investment Grade (synthetic; TER 0.14%) and the PowerShares EuroMTS Cash 3M ETF (physical; TER 0.15%) track an index that measures the performance of the broad Eurozone government T-bill market.