Analyse: Source STOXX Europe 600 Optimised Banks ETF

In the aftermath of the global financial crisis, sovereign debt has become a staggering concern for Europe, and of particular concern for European banks that are large holders of it. Debt-to-GDP levels have gone above 100% in several eurozone countries. Ireland and Portugal have had to be bailed out by the European Union and the International Monetary Fund, and Greece has seen a full-blown restructuring of its debt, with haircuts of more than 50%. The lifelines being tossed to various countries are also a way to shore up the banks that have lent to them. The good news is that banks have generally recapitalised. In June 2011, the European Banking Authority (EBA) suggested that 27 banks had a combined capital shortfall of €76 billion to get them to Core Tier 1 ratios of 9%. In a recent report, the EBA reported that as of the end of June 2012, those banks have gone above and beyond that target, bolstering their balance sheets by a total of €94.4 billion. According to Morningstar research published in May, Core Tier 1 ratios had indeed stabilised, with most banks at or near 10% at that time. But tangible common equity ratios to tangible assets, a more conservative measure, remained well below the 5 – 6% level considered minimally acceptable, and there was wide divergence in the results, with weaker banks badly undercapitalised. A European Summit that took place on June 28th and 29th made rescue funds from the European Financial Stability Facility available to directly recapitalise banks. At the same time, it floated plans for a pan-European banking regulator. The news had a positive, though short-lived, effect on stock prices. As could be expected, having been beset by crisis for much of the last five years, the performance of the STOXX Europe 600 Optimised Banks Index has been miserable. An amount invested at the start of 2001 would have cumulatively lost 54.22% of its value through July 2012. By comparison, the broader MSCI Europe Index has been roughly flat over the same period. Between June 2007 and February 2009, the index suffered a peak-to-trough drawdown of more than 78%. The index is very top-heavy, dominated by the fortunes of HSBC Holdings, Banco Santander, and a handful of other top positions. Using the most recent closing price as of the time of this writing, shares of HSBC are trading at a 20% discount to what Morningstar’s equity research team reckons its fair value is. Banco Santander is 10% below Morningstar’s fair value estimate, and after that UBS and BNP Paribas are trading at respective discounts of 21% and 28% to Morningstar equity analysts’ fair value estimates.

Indexkonstruktion

The STOXX Europe 600 Optimised Banks Index is weighted by free-float market capitalisation with a liquidity adjustment. It covers bank stocks from the following markets: Germany, Austria, Belgium, Denmark, Spain, Finland, France, Ireland, Italy, Luxembourg, Norway, the Netherlands, Portugal, United Kingdom, Sweden, and Switzerland. The index’s universe takes all the stocks contained within the broader STOXX Europe 600 Banks Index and excludes those from Greece, then removes the 30 least liquid and the 30 hardest to borrow securities, provided that there are at least 10 stocks remaining after this screen, and that the combined free-float market capitalisation of the excluded stocks does not exceed 20% of the sector’s total market capitalisation. The index is reviewed quarterly, with buffers around the entrance criteria in order to reduce the turnover. The weight on any individual stock in the index is presently capped at 10%, although that maximum could change if more securities are added to the index. Stock weights are also scaled down if they are above the stock’s average daily turnover for the previous three months. At present there are 36 names in the index but it’s fairly top-heavy. The top five names account for 42.5% of the total. The median constituent’s market cap is €6.4 billion.

Fondskonstruktion

Although Source labels the replication method as “physical with swap overlay,” it is, as the rest of the market defines the term, synthetic. The ETF uses an unfunded swap to achieve the total return of the index, meaning that it owns the basket of securities that acts as collateral in the swap. Source offers complete transparency on that collateral basket; currently it is made up of publicly-listed European equities from a number of industries and heavily weighted towards Financials. Source is owned by Goldman Sachs, Bank of America Merrill Lynch, JP Morgan, Morgan Stanley, and Nomura, and it uses all of these entities as counterparties to the swaps in its ETFs. The use of multiple counterparties can diversify and thus mitigate counterparty risk for synthetic products. Source’s policy is to reset to zero the fund’s exposure to any counterparty when it reaches 0.2% of the fund’s net asset value at the end of any day, and if necessary to cap overall exposure to all counterparties at 4.5%. 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 costs or fees associated with providing the exposure. The fund has the Euro as its base currency and is domiciled in Ireland. It is ISA eligible and has U.K. reporting status. Dividends from the underlying stocks are reinvested on a continuous basis. According to Source, the fund does not engage in any securities lending activity. At the time of writing it had assets of roughly €55 million.

Gebühren

The fund’s total expense ratio (TER) is 0.30%, which is in line with other products offering similar exposure. Other costs potentially borne by the unitholder but not included in the TER include swap fees, bid-ask spreads on the ETF, transaction costs on the infrequent occasions when the underlying index holdings change, and brokerage fees when buy and sell orders are placed for ETF shares.

Alternativen

To get exposure to European financial stocks, there are a few choices. These include Amundi ETF MSCI Europe Banks, ComStage ETF STOXX Europe 600 Banks, SPDR MSCI Europe Financials, db x-trackers STOXX Europe 600 Banks, Source STOXX Europe 600 Opt Banks, EasyETF STOXX Europe 600 Banks, and iShares STOXX Europe 600 Banks. Of these, the Lyxor fund is the largest. The Amundi and ComStage products have the lowest TER, at 0.25% each.