Rolle im Portfolio
Like all money market funds, the iShares eb.rexx Money Market (DE) ETF offers investors the possibility to invest cash holdings without incurring a significant level of risk. The trade-off is one of returns, with money market funds in general aiming at best to marginally better prevailing money market rates. The main objective is one of providing a bullet-proof and highly flexible vehicle to invest cash on fairly short-term horizons.
The iShares eb.rexx Money Market ETF could play a role as a core holding in an investment portfolio as a near-perfect substitute for outright cash positions. Some investors may also see money market funds as a vehicle to neutralise the so-called “cash drag” (e.g. the diminishing effect on overall returns of holding rather than investing cash). Investors wanting to make use of a money market ETF for cash management purposes will have to carefully consider whether the returns on offer are financially attractive relative to alternative vehicles measured against key economic variables (e.g. interest rates, inflation).
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 ETF tracks an index solely made up of very short-dated German government bonds in a bid to reflect money market trends. Some investors may see this as an extra layer of security. All these characteristics could make this ETF a key 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 has seen a gradual improvement through 2013. Perceptions about the Euro have changed for the better since the European Central Bank (ECB) verbalised an unequivocal commitment to ensuring its survival. Besides, although there still is a performance gap between core and peripheral economies, the latter are now showing some credible signs of a turnaround. Having said that, overall, the recovery remains fragile and subject to downside risks, while unemployment, particularly in the periphery, remains at very high levels.
The Eurozone has experienced a distinct lack of inflationary pressures since the start of the economic crisis. However, the disinflation process has accelerated in 2013, on a mix of lower international commodity prices, a strong Euro and the cost-competitiveness adjustment undertaken in the periphery. In fact, inflation rates in some peripheral economies are in negative terrain. With Eurozone HICP inflation below 1.0% and progressively deviating further from the price stability target of close to 2.0% y/y, the ECB decided to cut interest rates to a historical low of 0.25% at its November 2013 policy meeting. The ECB deposit rate was left unchanged at 0.00%. In addition, the ECB signalled that very loose – perhaps even looser – monetary settings shall remain in place for a protracted period.
Relevant money market rates, whether interbanking rates (e.g. EONIA) or very short-dated (e.g. 3m-6m-9m T-bill) government bond yields from core Eurozone issuers, have tended to follow a similar trajectory to ECB rates. The specifics of this iShares ETF (e.g. it tracks an index made up of German government bonds) calls for an assessment of trends in the Eurozone bond market. Germany has been the net beneficiary of risk-aversion flows since the onset of the crisis. This has driven German bond yields substantially down across the maturity spectrum, with short-dated bonds trading at a discount to the ECB’s refi rate for much of the crisis. In fact, during the most acute phases of the crisis, very short-dated German government instruments have been sold at negative yields. Although substantial corrective moves have taken place since the ECB President’s verbal intervention in defence of the Euro, chances of Eurozone government bond valuations reverting to pre-crisis levels have to be judged limited in the long-run. In fact, even in a scenario of a credible and long-lasting solution to the sovereign debt crisis, there is not much chance of seeing Germany losing its safe-haven status.
Indexkonstruktion
The eb.rexx Money Market index is calculated by Deutsche Boerse. The index comprises German government bonds with a remaining maturity between one month and one year to provide a reflection of the money market. Bonds must have a minimum outstanding issuance of EUR 4bn. There must be a minimum of six bonds for calculation. The weight of any bond in the index is capped to 30% by market capitalisation. The index is calculated both on price and total return basis, with values derived from best bid/ask quotes provided from Eurex. The index is rebalanced monthly on the last calendar day of the month. Coupon income is held as cash until rebalancing. Due to volatile market conditions, in January 2009 eb.rexx announced the suspension until further notice of its liquidity criteria to choose bonds to be part of its indices. In normal circumstances, to qualify for index inclusion bonds must have fulfilled the maximum bid/ask spread criteria of Eurex bonds (3-5 cents depending on maturity) on at least three quarters of trading days of the previous month. Bonds would be considered for potential exclusion if they do not fulfil the criteria on more than half of a month’s trading days, and for definitive exclusion if the criteria are not met for more than three consecutive months.
Fondskonstruktion
The iShares eb.rexx Money Market ETF was launched in July 2008 and is domiciled in Germany. iShares uses physical replication to track the performance of the eb.rexx Government Money Market total return index. The very narrow maturity focus effectively allows iShares to fully replicate the underlying basket of index constituents, although statistical weightings may vary slightly between the index and the fund and this ultimately can affect performance, if at the margins. This ETF distributes dividends. Dividend distribution for German-domiciled funds can be done up to four times per year, dependant on the decision taken by the management board for the fund. Historical data shows that before 2012 the payment of dividends tended to be done once per year in May, while from 2012 onwards it has been done on a Feb-May-Aug-Nov cycle. iShares may engage in securities lending in order to optimise the ETF’s tracking performance. BlackRock acts as investment manager on behalf of iShares. The amount of securities that can be lent is capped to 50% per fund. Lending operations are hedged by taking UCITS-approved collateral greater than the loan value and by revaluing loans and collateral on a daily basis. The collateral is held in a ringfenced account by a third party custodian. The degree of overcollateralisation is a function of the assets provided as collateral, but typically ranges from 102.5% to 112%. Lending revenue is split 60/40 between the ETF and BlackRock, respectively.
Gebühren
The total annual expense ratio (TER) is 0.13%. This sits towards the low-end of the 0.12-0.20% TER range charged by Eurozone money market ETFs tracking ultra-short government bond indices. 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. According to our research, the only like-for-like alternative to this iShares ETF in terms of issuer exposure is the Deka Deutsche Boerse EUROGOV Germany Money Market ETF. Also physically replicated, it charges a TER of 0.12%. Meanwhile the iShares EUR Government Bond 0-1 ETF (TER 0.20%) tracks the performance of the wider Eurozone ultra-short government bond market.
Measuring the performance of the Eurozone T-bill market we find the Amundi Cash 3M EuroMTS Investment Grade (synthetic; TER 0.14%) and the PowerShares EuroMTS Cash 3M ETF (physical; TER 0.15%).
Measured in terms of assets under management, the most popular money market ETFs are those tracking indices replicating the performance of a cash deposit remunerated on a daily basis 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). Amongst these, the Lyxor Euro Cash ETF (maximum TER 0.15%) and db x-trackers EONIA TRI ETF (TER 0.15%) are market leaders. Lagging in AUM, we find the Comstage EONIA ETF (TER 0.10%), Amundi EONIA ETF (TER 0.14%) and iShares EONIA ETF (TER 0.14%). All these ETFs are swap-based.
Meanwhile, the PIMCO Source Euro Enhanced Short Maturity Source ETF is an actively managed ETF aimed at exceeding the performance of EONIA by investing in a higher-yielding mix of corporate and government bonds with short residual maturity. The price for active management comes in the shape of a TER of 0.35%.
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