Analyse: Lyxor ETF IBEX 35

This ETF can also act as a satellite tool to tactically overweight Spanish equities within an internationally diversified portfolio. However, investors need to be aware that the geographical tactical role of this ETF goes beyond the confines of the Spanish market. Indeed, as is the case with many other European stock market indices, the Spanish IBEX 35 is both a dual bet on Spain and the broader international economies. Within the selected group of the largest six IBEX 35 components, we find truly multinational companies such as Telefonica, Banco Santander, BBVA, Iberdrola, Repsol YFP and Inditex, which derive a large share of their revenue from their non-Spanish operations. As such, investors may use this ETF to take tactical bets on either the geographical areas these key companies operate as well as on broad economic sector performance. Additionally, the fund’s tilt towards high-quality value stocks could also make it a good choice for balancing out a growth-leaning portfolio.

Investors outside of the Eurozone looking at this EUR-denominated ETF should be aware of currency risk. 

Fundamentale Analyse

Spain can be classed as one of the main casualties of the global economic and financial crisis. The housing bubble burst has not only left the big Iberian economy espousing one of the highest unemployment rates of the entire developed world (e.g. over 24% as we write), but with an economic growth model in need of structural adjustment and a banking sector dogged by its exposure to bad loans to housing developers which has ultimately been the subject of a Eurozone-funded EUR 100bn bailout.

Spanish GDP grew by 0.7% y/y in 2011, but the economy was experiencing a clear slowdown in the H2-11, which has continued in H1-12, with both Q1 and Q2 showing an average 0.3 q/q contraction. All main economic indicators point to continued weakness for the remainder of the year. GDP is expected to contract by at least by 1.7% y/y in 2012, while forecasts for 2013 point to a mild improvement, though not strong enough to avoid another year of economic recession. Private consumption remains hamstrung by the combination of adverse labour market conditions and a programme of budgetary consolidation combining tax increases and public expenditure cuts.

All in all, the fate of the Spanish economy relies on the success of the various reforms undertaken at national level and, needless to say, a credible and permanent resolution of the Eurozone debt crisis lifting one of the main dark clouds over the global economy. Spanish macro readings in the near-term should not be expected to improve in any meaningful way. As such, the focus for international investors looking at Spanish economy should be in the medium to long-run.

The crisis has severely undermined Spanish valuations at all levels. As we write, the Spanish stock market, as measured by the Ibex 35 index, has lost some 60% of its value from the pre-crisis highs of 2007 and is closing in to the post-tech bubble lows of 2002. The bulk of the losses are directly related to the negative effects of the Eurozone sovereign debt crisis on Spanish financial institutions, which have now become very dependant on the liquidity provided by the European Central Bank (ECB). This has propelled Spanish financial stocks, which make up the bulk of the IBEX 35 index, well into undervalued territory. 

Against this general valuations backdrop, some investors may see Spanish stocks as a tactical buy opportunity. If so, we would argue that this is likely to be rationalised on the beneficial effect of the international dimension of most companies making up the IBEX 35 rather than on a significant change in perceptions with regards Spain’s immediate macroeconomic future. Indeed, big Spanish banks such as Banco Santander and BBVA may have to pay a country risk premium in order to access funding in the wholesale market, but they have been reaping very substantial rewards courtesy of their operations in fast-growing Latin America. The same goes for truly multinational companies such as telecoms giant Telefonica or world’s top retailer Inditex, which continue to grow their business at a good pace beyond Spain’s geographical confines.

Indexkonstruktion

The IBEX 35 is a market capitalisation weighted index which comprises the 35 most liquid Spanish stocks traded on the Madrid Stock Exchange. The index is reviewed twice a year in June and December by a technical advisory committee. In order to be considered for inclusion, the average free float market capitalisation of the stock must be at least 0.30% of the total market capitalisation of the index. Financials is the biggest sector represented in the IBEX 35, accounting for around 35% of its value, followed by telecommunications (around 20%), utilities (10-15%) and industrials (around 10%). The IBEX 35 index is extremely top heavy form the perspective of individual names. As of this writing, Telefonica is the largest component with an average weighting close to 20%, followed by Banco Santander (15-18%), BBVA (around 9-10%), Inditex (9-10%), Iberdrola (7-8%) and Repsol YPF (7%). The individual statistical weightings of all remaining stocks stand in a 0.10-3.00% range. 

Fondskonstruktion

Lyxor uses synthetic replication to track the performance of the IBEX 35 net total return index. This ETF was launched in October 2006 and is domiciled in France. Lyxor uses the unfunded swap model. The ETF buys a basket of securities (ie. substitute basket) from Societe Generale 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. The substitute basket is generally made up of blue-chip shares, largely European and with a minimum of 75% of the basket composed of stocks from Eurozone-based companies. It is not unusual for the fund not to contain many of the stocks that make up the benchmark index. In fact, a snapshot of the fund’s basket as of this writing (e.g. mid June 2012) showed it only contained four of the IBEX 35 top components with a combined weight of 12%. Of the remaining fund components close to 50% in weight terms were German stocks, while non-Eurozone equities accounted for close to 9% of the basket and were all Japanese. According to UCITS regulations, individual counterparty risk exposure is limited to 10% of the fund’s NAV at any point in time. According to our research, the OTC swap is not collateralised, which effectively exposes the investor to a loss of up to 10% of the NAV if the swap counterparty defaults. However, Lyxor is now committed to target zero swap exposure on a daily basis and is also considering the virtues of adopting an overcollateralised structure. 

Gebühren

The annual total expense ratio (TER) for this ETF is 0.33%. This is the top-end of the TER range (e.g. 0.25-0.33%) for ETFs giving plain vanilla long exposure to the Spanish large-cap equity market.

Alternativen

BBVA Acción IBEX 35, a physically-replicated ETF charging a TER of 0.33%, launched a few months ahead of the Lyxor fund, retains the top spot in this particular segment as measured in terms of assets under management (AUM) as we write, with the Lyxor fund coming in a close second. The Amundi ETF MSCI Spain came to the market two years after both BBVA and Lyxor. It charges a lower TER of 0.25% but it tracks a different index, namely the MSCI Spain, which comprises a fewer number of components than the IBEX 35. The db x-trackers IBEX 35 ETF, a swap-based ETF charging a TER of 0.30%, came to the marketplace in April 2011 and lags behind all other competitors in AUM terms.

Investors interested the broader Iberian region rather than just the Spanish market could look at the ESAF NYSE Euronext Iberian ETF (TER 0.45%). This swap-based fund tracks an index comprising the 20 most liquid companies listed in the Madrid Stock Exchange and the 10 most liquid companies listed on Euronext Lisbon.