db x-trackers II iBoxx EUR Germany Total Return Index ETF

Fundamentale Analyse

The eurozone sovereign debt crisis has catapulted sovereign risk to the forefront of current pricing dynamics shaping the eurozone government bond market. Prior to the onset of the crisis, markets had largely adhered to the theoretical notion of economic convergence between eurozone members allowing for the spreads relative to German Bunds to shrivel to near zero. As the crisis unfolded, it became apparent that the theoretical elimination of country-specific risk was a fundamentally flawed thesis from the start. Due to this shift in risk perceptions, Germany has recaptured its pre-euro era status as the region's lynchpin. As a result, German bond yields fell to historical lows, while cross-country bond spreads to Germany, particularly of the eurozone's periphery members, widened significantly; reverting to pre-eurozone levels in some instances.

Following the sea change in the eurozone, Germany has taken the opportunity to reassert itself as the region's monetary anchor and has begun to direct policy towards fiscal convergence. At the December 2011 EU summit, Germany and France championed a 'fiscal pact' whereby member states committed to imposing stricter deficit reduction policies and austerity measures across the eurozone. Structural reforms like these take time to implement, however, and more immediate actions have been implemented to quell market uncertainty, such as the long-term refinancing operations (LTRO) and outright monetary transactions (OMT) undertaken by the European Central Bank.

While the German economy has held up far better than its regional counterparts thus far, the euro-area recession has taken its toll. German GDP growth steadily slowed throughout 2012 before ending the year with a significant contraction of 0.6% in the fourth quarter. At the start of 2013, however, the preponderance of evidence suggests that the German economy will be bouncing back quite quickly. To arrive at this consensus, most economists have pointed to Markit’s Purchasing Manager Index (PMI) data, which measures monthly expansion/contraction of output, where a reading above 50 indicates expansion. Historically, PMI has been highly correlated with GDP growth figures. In February, German PMI came in at 53.3 down from 54.4 in January. Broadly speaking, the PMI readings indicate that the German private sector business activity has picked up with rises in both manufacturing and service sector output. With the rebound in output levels, it seems plausible that the German economy should return to growth in the first quarter of 2013.

Looking further ahead, the outlook for the eurozone sovereign debt market remains in a state of tremendous fluidity. The mild tightening cycle of mid-2011 has been fully reversed, with ECB short-term and 3 year interest rates down to 0.75% as we write. Meanwhile inflation has been trending lower, with the inflation rate hovering around 1.8% as we write.

Indexkonstruktion

The Deutsche Borse iBoxx Euro Germany index is produced and disseminated by Deutsche Borse. The index provides exposure to the entire maturity segment of the Germany sovereign debt offerings and is weighted by market capitalisation. Index constituents must be fixed rate bonds with a minimum time to maturity of at least one year at the time of rebalance, and a minimum outstanding of EUR 2bn. German sovereign bonds meeting these criteria will be included in the index and weighted according to their total amount outstanding. The index is calculated on a total return basis. Index values are calculated in real time on the basis of best bid/ask quotes from the price contributors, typically large banks or market makers. The index rebalances monthly on the last calendar day of the month.

Fondskonstruktion

db x-trackers employs synthetic replication to track the Deutsche Borse iBoxx Euro Germany index. For its fixed income ETFs, db x-trackers will tend to put together a fund basket primarily made up of Eurozone corporate and government bonds. A snapshot of the substitute basket at the time of writing this report showed it was composed entirely of top-rated German government bonds. In principle db x-trackers sets out generic limits on the various asset classes the fund can invest in. However, these limits are not fixed and can be changed to account for market circumstances. Once the basket of securities is in place, db x-trackers will enter into a total return swap with Deutsche Bank whereby it exchanges the performance of the basket for that of the reference index. According to UCITS III regulations, individual counterparty risk exposure is limited to 10% of the fund’s NAV at any point in time. In essence, as db x-trackers is a subsidiary of Deutsche Bank, counterparty risk arising from swap transactions ultimately remains within the same financial group. According to our research, in the case of fixed income ETFs, db x-trackers has a generic policy of re-setting swaps to zero when counterparty exposure reaches 5% of NAV and/or whenever there is creation or redemption of units. The frequency of swap resetting can be daily. At this time, it is db x-trackers' policy to not engage in securities lending and thereby limiting counterparty risk associated with this activity. The fund distributes dividends annually in July. The fund was launched in October 2007, is domiciled in Luxembourg, and its base currency is Euros.

Gebühren

db x-trackers charges a total expense ratio (TER) of 0.15% for this ETF, which falls in line with other funds in this category.

Alternativen

Currently, the db x-trackers iBoxx Germany TR ETF is the third most popular ETF tracking the German government fixed income space in terms of assets under management (EUR 177 million) and currently is the only synthetically replicated ETF tracking the entire maturity spectrum of the German government debt curve.

The physically-replicated iShares eb.rexx Government Germany ETF is the most popular ETF in terms of AUM. It charges a TER of 0.15% and tracks the eb.rexx Government Germany TR index, which caps the number of constituents at 25. The also physically-replicated ETFlab Dt Boerse EUROGOV Germany ETF is the second most popular ETF in the market for this particular exposure in terms of AUM. It tracks an index of 15 highly liquid Germany government bonds.

Investors searching for more liquid alternatives, but willing to compromise somewhat on country exposure could consider the Lyxor EuroMTS Macro-Weighted AAA Government Bond, with a TER of 0.165%. The ETF tracks a fundamentally-weighted index mandated to cover the universe of AAA-rated Eurozone government market. Upon S&P’s ratings downgrade of both France and Austria, the fund should see a substantial rebalancing of its portfolio to comply with the strict ratings criteria on which the reference index is built. The statistical weight of Germany in this index could increase from around 48% to 75-80%, with the remainder split between the Netherlands and Finland, the remaining AAA-rated nations in the eurozone.