Analyse: ETFlab Dt. Boerse EUROGOV Germany 5-10 (EUR)

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 have fallen to historical lows, while cross-country bond spreads to Germany, particularly of the eurozone's periphery members, have 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 needed to quell market uncertainty. With the willingness of her fellow member states to enact stricter fiscal measures, Germany has lent its support to the creation and increased firepower of the European Financial Stability Facility, the continuation of Greek bailouts, and the increasingly favourable lending terms offered by the European Central Bank (ECB).

Germany remains the eurozone's economic engine with GDP growth in 2011 outpacing the eurozone's. The German economy has been bolstered relative to its peers due to the strength of demand for German exports, particularly from Asian emerging countries. This performance has allowed Germany to post its lowest jobless rate since 1991. Economists have warned that the Germany economy could realise slower growth in 2012 if export demand were to fall due to worsening global economic conditions. For example, China's economy has been showing signs of slowing, while the economic health of some of Germany’s eurozone partners remains severely hampered by the austerity programmes implemented to deal with the sovereign debt overhang. Despite these risks, in its December 2011 report the Bundesbank indicated that industrial production and construction were expected to remain areas of economic strength.

Looking ahead, the outlook for the eurozone sovereign debt market remains in a state of tremendous fluidity, as the January round of ratings downgrades by S&P - including the loss of AAA by France, Austria and the EFSF - showed. The mild tightening cycle of mid-2011 has been fully reversed, with ECB short-term and 3y interest rates down to 1.00% as we write. The downward trend in the current inflation rate, and more importantly, the lowering of medium-term inflation expectations towards the ECB’s price stability target of around 2.0%, bodes well for a protracted period of ultralow interest rates, with further cuts appearing a distinct possibility.

Indexkonstruktion

The Deutsche Borse EUROGOV Germany 5-10y index is produced and disseminated by Deutsche Borse and aims to track the performance of the 5-10y maturity segment of the Germany sovereign debt market. Interest payments are reinvested into the index as soon as they are paid. The index employs a market capitalisation methodology to determine index weights. In general, highly liquid bonds with a higher nominal value and shorter time to maturity are preferred. Index constituents must be fixed rate bonds with a minimum outstanding of EUR 4bn. German sovereign bonds meeting these criteria will be included in the index up to a maximum of 15 constituents. Index constituents are weighted according to their total amount outstanding. The index employs a cap to limit the size of any one constituent to 30% of the overall index value. The index rebalances quarterly.

Fondskonstruktion

ETFlab uses physical replication methods to track the performance of the Dt Boerse EUROGOV Germany total return index. The fund buys all the securities within the index, in the same weightings as stipulated by the index. ETFlab makes 100 % of the fund’s securities available for lending. All revenues generated through securities lending are passed on to the fund. Although this activity can help to partially offset the TER, it exposes investors to counterparty risk. To protect the fund from this counterparty risk, ETFlab takes collateral greater than the value of the borrowed securities. Collateral levels vary from 102% to 105%, depending on the assets provided as collateral and on the credit quality of the borrower. The ETF distributes dividends semiannually with payments scheduled to be made in April and October. The fund is domiciled in Germany and its base currency is Euros.

Gebühren

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

Alternativen

According to our research, the closest alternative we can find to the ETFlab Dt Boerse EUROGOV Germany 5-10 ETF is the iShares eb.rexx Government Germany 5.5-10.5 ETF. The iShares ETF is physically replicated and the most popular ETF in the European market marketing this particular segment, with assets under management (AUM) above EUR 850mn as we write. Further down the AUM scale, we find Comstage’s iBoxx Euro Sovereign Germany Capped 5-10y TR ETF, a swap-based, non-coupon distributing vehicle with a lower TER of 0.12%.  

Investors searching for more liquid alternatives above and beyond the iShares ETF would have to compromise on country exposure and choose amongst the array of ETFs tracking the performance of the medium-to-long-dated segment of the Eurozone government bond market. Amongst these we highlight the Lyxor EuroMTS AAA Macro-Weighted (TER 0.165%), and db x-trackers iBoxx Euro Sovereigns (TER 0.15%) family of ETFs. However, investors would not only have to compromise on country exposure but actually engage in block building in order to attain the same level of maturity bracket exposure, for both Lyxor and db x-trackers ETF offerings are split into 5-7 and 7-10 maturity segments, which might complicate matters. These Lyxor and db x-trackers ETFs are swap-based and track pan-Eurozone rather than German-centric indices, and although iBoxx excludes non-investment grade issuers. Still, investors considering these vehicles should make sure they are comfortable taking on exposure to non-German government bonds.