Rolle im Portfolio
The Lyxor Eastern Europe ETF provides exposure to some of the largest stocks within the developing markets of Poland, Hungary and the Czech Republic. It is best deployed as a tactical tool to capture continued growth in these three countries.
The underlying index, CECE Total Return, is narrowly focused in a number of ways. First, it only has 30 constituents so there is considerable concentration within the top names. Second, Polish stocks account for over three-quarters of the weighted index. Third, the index is heavily tilted towards financials.
Returns on the index have been quite volatile, exhibiting annualised standard deviation of 22.5% since 2009, versus 14.7% for the MSCI Europe. Over the same period it has shown a correlation of 80% to the MSCI Europe Index.
The fund does not pay dividends, so it may not suit investors looking for regular income.
Fundamentale Analyse
The three countries covered by the CECE Index— Poland, Czech Republic and Hungary— are all members of the European Union (EU) but not the Eurozone, meaning they still use their own currencies. Once seen as a weakness, not being on the euro has provided flexibility in dealing with the economic crisis. In tough economic times, a declining currency can help a country by alleviating the burdens of locally-denominated debt and making its exports more attractive to foreigners.
Although each country boasts a market economy and democratic governance, they are still considered emerging markets by index provider MSCI. The major risk for this group is governance – all three countries ranked below 45th in the World Bank’s ‘Ease of Doing Business Report’ and 37th in Transparency International’s “Corruption Index.”
Unlike many of its EU peers, Poland’s banks and institutions escaped much of the economic slowdown in recent years. Poland’s GDP grew by 1.6% in 2013, hardly robust but higher than many European countries. With its increased household consumption and job creation— ranked third on the continent behind the UK and Russia—, the IMF forecasts Poland’s GDP growth to reach 3.4% in 2014.
But other potential pitfalls like a relatively high rate of non-performing loans could still weaken its financial sector. And despite job creation, Poland has struggled with an unemployment rate consistently above 9% since 2009.
To the west, the Czech Republic’s GDP shrank 1.0% in 2013 and is technically still in the recession it entered at the end of 2011. The Czech Central Bank has kept short-term rates at a scant 0.05% since November 2012, and still predicts that inflation will undershoot its 2% target as the weakening economy puts downward pressure on prices.
Meanwhile, Hungary emerged from its 2012 recession, with a surge in net exports in 2013 although private demand remains weak and its GDP contracted 1.7% in 2013. Its unemployment rate has steadily dropped below 8%, from above 11% since 2009. Hungary’s private sector has not taken well to the 2014 re-election of Prime Minister Viktor Orban and his right-wing party Fidesz. Orban’s plan to recentralise key economic sectors like energy and banking, known as ‘Orbanomics,’ could cut into private profits.
Indexkonstruktion
The CECE Total Return Index is a free-float market capitalisation-weighted index covering stocks on the Budapest, Prague, and Warsaw Stock Exchanges. It has 30 constituents, and individual weights are capped each quarter at 20%. There are no minimum turnover requirements for new entrants, although the index committee will take trading volume into consideration when looking at the eligible universe. The index is reviewed and rebalanced on a semi-annual basis. To limit turnover of constituents, a maximum of three names can be replaced at each review. Geographically, the index is heavily tilted towards Poland, with 81-83% of the total weighting. The Czech Republic accounts for 9-11% and Hungary 5-7%. There is also a tilt towards the financial services sector, making up 54-56% of the index. After that, the biggest sector weights are utilities (13-15%), oil and gas (11-13%) and basic materials (9-11%). The index is highly concentrated, with 56-58% within just the top 5 stocks. The largest individual constituents are Pko Bank Polski (16-18%), Powszechny Zaklad Ubezpiecze (12-14%), Bank Pekao (10-12%) and (Kghm Polska Mledz (8-10%).
Fondskonstruktion
The fund uses synthetic replication to provide exposure to the underlying benchmark, entering an unfunded swap transaction with parent bank Societe Generale. The fund uses investors’ cash to buy a substitute basket of securities, the performance of which is exchanged for the performance of the index. Lyxor provides full transparency on the components of the substitute basket, which is made up predominantly of European and Japanese equities. The fund aims to maintain zero counterparty exposure by reviewing the swap on a daily basis and resetting whenever its value becomes positive. At the time of writing the substitute basket was valued at 99.83% of the net asset value of the fund. The fund’s holdings, which are monitored daily by Lyxor’s asset manager, are held in a segregated account at Lyxor’s custodian, Societe Generale Security Services. Under the terms of the swap, the counterparty agrees to provide the fund with exposure to the total return of the underlying index, net of any associated taxes, costs, or fees. The return from the swap assumes that all dividends paid by the underlying stocks are reinvested in the index.
Gebühren
The fund has a total expense ratio (TER) of 0.50%. Other costs potentially borne by the unitholder but not included in the TER include swap fees, and bid-ask spreads and brokerage fees when buy and sell orders are placed.
Alternativen
For exposure to Eastern European equities, there are a several options, albeit referencing different indices. These include SPDR MSCI EM Europe ETF, Amundi ETF MSCI Eastern Europe ex Russia, iShares MSCI Eastern Europe 10/40 (IE), ComStage ETF MSCI EM Eastern Europe and db x-trackers MSCI EM Eastern Europe 10/40. The Amundi fund has the lowest fees, with a TER of 0.45%.
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