Rolle im Portfolio
The Lyxor EuroMTS 5-7y Investment Grade ETF is a vehicle that offers investors exposure to the medium-dated segment of the Eurozone government bond market. Some investors may consider this an appropriate enough instrument to manage cash holdings in core portfolios. However, the ETF’s medium-dated maturity bias and the exposure to all Eurozone issuers carries a higher level of risk for cash management purposes in comparison to instruments tracking shorter-dated maturity indices and/or restricted to the safer top-rated issuers.
Investors considering this ETF have to make sure they are comfortable with taking on the associated risks of tracking an index covering all Eurozone issuers with investment grade rating rather than just AAA-rated sovereigns. For example, during the most acute phases of the sovereign debt crisis episodes, government bonds issued by Eurozone peripheral debt agencies have routinely faced substantial selling pressure on fears of default, negatively impacting the performance of tracking indices. Conversely, any decrease in financial market tensions with regards to the Eurozone debt situation has tended to benefit peripheral government bonds.
This ETF can also be used tactically to manage interest risk exposure. As such, we would see it more as a satellite than core investment holding, and one aimed at micro-managing the duration of a broader fixed income portfolio. However, it is worth noting that the medium-dated maturity bias of this ETF could make this a particularly sophisticated task. Given the required knowledge of yield curve dynamics, the tactical use of this ETF is likely best suited to institutional investors. The tactical usage of this ETF would call for close monitoring of economic developments and a good understanding of their implications for ECB monetary policy, particularly with regards to timing of interest rate moves. Times of uncertainty about the timing of future monetary policy moves are probably the best to display the tactical use of this ETF as a vehicle to micro-manage duration of fixed income portfolios.
Fundamentale Analyse
The economic outlook for the Eurozone has been improving through 2013. However, expectations remain for a sustained period of sub-par performance, albeit positive, going forward. No significant changes in the chosen budget consolidation policy path are envisaged. Meanwhile, despite significant improvements in external competitiveness in the Eurozone periphery, their private sectors are severely hampered by the still impaired bank lending channels.
Against this general backdrop, the ECB maintains a very accommodative monetary policy stance. Interest rates have been cut to a historically low of 0.5%, while at its July 2013 meeting the ECB explicitly signalled an intention to keep them at these, or even lower, levels for an “extended period of time”. This is entirely dependent on the outlook for price stability, which remains the ECB’s one and only policy objective. However, as the Eurozone inflationary outlook remains pretty subdued, it can be inferred that “extended” should at least mean “well into late 2014 or even longer”. Aside from conventional monetary policy measures, the ECB also remains focused on the issue of financial stability, routinely providing ample liquidity at very favourable terms to the Eurozone banking sector.
The core-periphery dichotomy in bond pricing dynamics remains a key factor shaping the performance of ETFs providing exposure to the Eurozone government bond market. Severe market tensions in the summer 2012 forced the ECB President Draghi to announce that the central bank was ready to do “whatever necessary to ensure the survival of the Euro”. This declaration of intent was later formalised in the Outright Monetary Transactions (OMT) programme, whereby the ECB would purchase unlimited amounts of government debt in the secondary market upon request from a government in exchange for this to adhere to a strict programme of reforms supervised by the EU and IMF.
Mr Draghi’s verbal intervention proved credible enough to allow for a significant decrease of tensions. The OMT programme has never been put to the test. However, peripheral government bond yields have fallen substantially from the 2012 peaks, while their spreads to core government bonds have more than halved. In short, although concerns about the long-term financial health of the Eurozone do remain, markets have priced out a break-up scenario.
An improving economic backdrop should be increasingly unsupportive for fixed income instruments such as government bonds. However, the post-crisis dichotomy in Eurozone sovereign bond dynamics means that, for now, any potential price falls in core issuers are likely to be offset by price increases in peripheral bonds until a proper equilibrium point is reached. Besides, overall, ECB monetary policy settings remain somewhat supportive of medium-dated bonds for the time being.
However, on a longer-term timeframe, the path of least resistance for all bond prices firmly points south. In that situation the increased likelihood of capital losses should undermine the role of this ETF as a cash management vehicle. However, it would be in this situation of rising yields and tighter monetary policy conditions when the tactical usage of this ETF (e.g. duration exposure management) would come fully into play.
Indexkonstruktion
The EuroMTS Investment Grade Eurozone Bond 5-7 Index is produced by EuroMTS. The purpose of the index is measure the performance of the Eurozone’s largest and most actively traded conventional government bonds with a maturity between five and seven years quoted on MTS markets and with an investment grade rating from at least two of the three main rating agencies (e.g. S&P, Moody’s and Fitch). Greek and Portuguese government bonds are not eligible to be part of this index as we write. Eligible bonds must have a minimum outstanding issuance of EUR 2bn. Each issuer is represented by a maximum of two bonds within the chosen maturity range. Component bonds are statistically weighted to represent the size of each country’s total outstanding debt with maturity of 5y-7y relative to the investment grade Eurozone market. The index is calculated on a total return basis, with coupon payments reinvested overnight. Index calculations are carried out in real time with three price fixings through the trading session, with the last fixing at close of trading. All prices are MTS system bid prices. The index is rebalanced on a monthly basis at the beginning of the month, with planned changes announced two weeks in advance. New bonds entering an index portfolio for the first time use the best offer price quoted in MTS. Bonds with embedded options or convertibility are not eligible for inclusion in the index.
Fondskonstruktion
The Lyxor EuroMTS 5-7y Investment Grade ETF was launched in September 2005 and is domiciled in France. Up until May 2013, Lyxor used synthetic replication (e.g. unfunded swap model) to track the performance of the benchmark index. However, from May 2013 onwards, this ETF uses physical replication. The ETF does not distribute dividends. Lyxor uses full replication to track the performance of the EuroMTS Investment Grade Eurozone Bond 5-7 index. By definition, the ETF basket will contain all of the reference index components, while keeping the overall statistical distribution, both by issuing country and maturity segment. However, minimal differences in components’ statistical weightings between the ETF and the index may occur. As we write (e.g. mid August 2013), the four largest Eurozone issuers by market capitalisation in this maturity segment (i.e. France, Italy, Germany and Spain) account for close to 80% of the fund’s holdings value. The ETF will not invest in financial derivative instruments, except in bond and/or index futures which may only be used on an ancillary basis and within regulatory limits. This Lyxor ETF does not engage in securities lending.
Gebühren
The annual total expense ratio for this ETF is 0.165%. This TER is just above the mid-point of the annual cost range (e.g. 0.12-0.20%) for ETFs from the main European providers tracking indices biased to the 5y-7y segment of the Eurozone government bond market. 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
Compared to other maturity segments of the Eurozone government bond curve, ETFs offering exposure to the 5-7y bracket are not amongst the more popular investment choices.
Alternatives to this Lyxor ETF offered by other providers include the db x-trackers iBoxx Euro Sovereign 5-7 TR ETF. A swap-based ETF, it charges a lower TER of 0.15% and tracks the performance of an index which also excludes non-investment-grade issuers. Further down in the AUM scale we find the iShares Euro Government Bond 5-7 ETF, a physically replicated fund charging a TER of 0.20% and tracking an index measuring the performance of the most liquid investment-grade government bonds within the 3-5y maturity bracket issued by the largest Eurozone issuers.
Other alternatives lag even more significantly in liquidity terms, alhtough most tend to compensate with lower TERs. For example the Comstage iBoxx Euro Liquid Sovereign Diversified 5-7 ETF has a TER of 0.12%. Carrying a TER of 0.15% we find the physically replicated Deka iBoxx EUR Liquid Sovereign Diversified 5-7 ETF, while charging a TER of 0.14% we find the swap-based Amundi Government Bond EuroMTS Investment Grade 5-7y ETF.
Investors seeking to minimise country risk while maintaining exposure to the medium-dated segment of the Eurozone bond market also have the choice of ETFs tracking indices restricted to only AAA-rated issuers or even solely focused on Germany.
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