db x-trackers II iBoxx Global Inflation-Linked UCITS ETF 1C (EUR hedged)

Fundamentale Analyse

Despite the recovery in most developed economies and the loose monetary policy settings in place, the still high level of spare capacity is allowing them to keep domestic inflationary pressures at bay. Bar some exceptions, unemployment at above-average levels plus the need to redress the budgetary situation are two key elements that should keep domestic price pressures under control. 

As such, the crux of any potential inflationary matter for the bulk of developed economies would seem to lie primarily on the evolution of international commodity prices and the pass-through from emerging markets. However, on both of these instances the outlook also points to an absence of relevant concerns. Indeed, imported price pressures have also declined on a mix of appreciating developed currencies and falling or stable commodity prices. 

All factors considered, the general consensus is for the world’s developed economies to continue enjoying a protracted period of subdued price pressures. In fact, if anything, concerns are not placed on inflation, but rather deflationary pressures developing in areas such as the Eurozone.

Forecasts from international bodies such as the IMF show international commodity prices trending down in 2014-2015; median inflation rates for developed economies around the 1.5-2.0% area in the medium-to-long term (e.g. out to 2019) and those for emerging market economies broadly stable in a 4.5-6.0% range. It is also important to underline that inflation expectations in most developed economies (e.g. US and Eurozone) remain at levels consistent with or below monetary policy targets notwithstanding the exceptionally accommodative policy settings in place. The absence of wage-led pressures – no doubt a by-product of still challenging labour market conditions – is proving a key element in neutralising inflationary risks.

Indexkonstruktion

The iBoxx Global Inflation-Linked TR EUR Hedged index measures the aggregate performance of the major sovereign and quasi-sovereign inflation-linked bond markets. Issuing countries and sub-sovereign entities must be rated investment grade by the three major rating agencies. Eligible bonds must have a minimum remaining maturity of at least one year at the time of inclusion and must also have a minimum outstanding in their respective local currency. The coupon of eligible bonds must be fixed. Zero-coupon inflation-linked bonds are eligible for inclusion. The index is market capitalisation weighted. As of this writing, countries included in the index were (note – listed by market cap value) the US, UK, France, Italy, Germany, Canada, Sweden, Japan, South Korea and Spain. The index is calculated daily on a total return basis using bid prices. Selected price providers submit bond price data three times a day to reflect local market closes in Asia, Europe and the US. These quotes are consolidated and used for the index calculation. The various local market returns are hedged in EUR. Spot and forward rates for hedge calculations are sourced from Reuters three times a day in London. The index is rebalanced monthly on the last calendar day of the month. Coupon income received during the month is held as cash and reinvested in the index at rebalancing.

Fondskonstruktion

db x-trackers uses synthetic replication to track the iBoxx Global Inflation-Linked TR EUR Hedged index. This ETF was launched in June 2007 and is domiciled in Luxembourg. This ETF does not distribute dividends. For its range of fixed income ETFs, db x-trackers uses the unfunded swap model. The ETF buys a basket of securities (ie. substitute basket) from Deutsche Bank 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. In most cases, the holdings of the substitute basket for the range of db x-trackers fixed income ETFs tend to have a high correlation with those of the benchmark index. In fact, it is not unusual for the substitute basket to be made up of bonds from the same issuers that the index tracks. Failing that, then the substitute basket would tend to be made up of high-quality 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. A snapshot at the time of this writing (e.g. early September 2014) showed that the ETF’s substitute basket was made up of 71 sovereign bonds – inflation-linked – from seven issuing countries (e.g. G7 ex-Canada plus Sweden), while the underlying iBoxx index was made up of 120 constituents from the ten issuing countries. According to UCITS III regulations, individual counterparty risk exposure is limited to 10% of the fund’s NAV at any point in time. 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. db x-trackers does not engage in securities lending with the substitute basket’s holdings.

Gebühren

The total annual expense ratio (TER) is 0.25%. This seems to be the average for European-domiciled ETFs offering exposure to the global government inflation-linked 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

The db x-trackers iBoxx Global Inflation-Linked was the first ETF in the European market to offer investors exposure to the performance of the global government inflation-linked bond market. As of this writing, it remains market leader in AUM terms.  

The main alternative is the iShares Global Inflation-Linked Government Bond ETF. Also charging a TER of 0.25%, the iShares ETF is physically replicated and tracks a Barclays Capital index that measures the performance of government inflation-linked bonds issued by the major developed economies. Restricting the bond universe to just sovereigns rather than both sovereigns and quasi-sovereigns, as opposed to the iBoxx index the db x-trackers ETF seeks to replicate, has little practical effect with regards to index construction, as quasi-sovereigns represent less than 10% of the inflation-linked bond universe. However, the two indices differ in terms of rating criteria for eligible bonds, and as of this writing the Barclays Capital index tracked by the iShares ETF does not include Italian inflation-linked government bonds. Aside from the replication methodology employed, another key difference between these two ETFs resides in the fact that the iShares fund is USD-denominated.