Analyse: UBS-ETFs plc - MSCI USA Growth TRN

Though its fortunes have been overshadowed somewhat by the events unfolding in Europe, the United States has continued to show lacklustre progress towards economic recovery. The unemployment rate, while off its highs, is still stubbornly lofty at 8.3%, and a portion of the decline seems due to some workers giving up on the job search and therefore falling out of the official calculation. Moreover, a study by National Employment Law Project found that a large portion of the job gains during the recovery has been in low-paying positions. GDP advanced at an annualised pace of 1.7% in the second quarter of 2012. The housing market has also been in a protracted funk due to an overhang of foreclosures. Historically, spending by the U.S. consumer has been a key driver of growth at home and around the globe, importing a host of finished goods from China and other growing markets. But after the implosion of the residential housing bubble, recession followed by a largely jobless recovery, and reluctance of banks to make loans, the average household doesn’t have the spending clout it once did. That situation, along with increased government austerity, could limit the country’s potential for growth, even as corporate balance sheets and profitability appear healthy. To pick up the stimulus slack, monetary policy has been extremely accommodative. The Federal Reserve has lowered short term interest rates to near zero, and signalled that they will persist at current levels for the foreseeable future. It has embarked on several rounds of quantitative easing, and Chairman Ben Bernanke recently announced another round that will last as long as needed. Despite this, the market does not appear overly worried about inflation, as evidenced by 10-year yields recently trading as low as 1.57% and 30-year Treasuries yielding less than 3%. As a result of the even bleaker situation in Europe, the U.S. has maintained its safe haven status among investors, which has enabled the government to continue to borrow on the cheap. Unless Congress intercedes to change the law, a series of major spending cuts and an expiration of Bush-era tax cuts will automatically trigger at the end of 2012, in what has been dubbed the “fiscal cliff.” The Congressional Budget Office predicts that could cause a shrinking of the deficit by $500 billion while leading to real GDP growth of -0.5% in 2013 and pushing the country back into recession. Many large U.S. companies have been able to register considerable earnings growth by expanding their businesses into emerging markets, where a newly formed middle class has created an enormous pool of potential new customers. Other large growth companies, such as Google, Amazon.com, and eBay Inc., have found new and effective ways to connect with- and capitalise on- a growing base of online users. The MSCI USA Growth Index has produced a total return of 1.53% per annum since the start of 1999, a little less than the 2.13% tally for the broader MSCI USA. Because of their perceived better prospects, growth stocks often trade at higher earnings multiples than value stocks. At the end of August the MSCI USA Growth Index had a price-to-earnings ratio of 17.6, a little above its five-year average of 17.4.

Indexkonstruktion

The MSCI USA Growth Index is weighted by free-float-adjusted market capitalisation. It currently contains 360 stocks, and targets 50% coverage of the free float-adjusted market capitalisation of the MSCI USA Index. Inclusion in the index requires passing screens for minimum size, trading volume, and length of trading history. To produce a growth tilt, the universe is screened for characteristics including short- and long-term forward earnings per share growth rates, historical earnings per share growth trends, and historical sales per share growth trends. The index is formally reviewed on a quarterly basis, although adjustments can be made at any time in the case of a significant corporate action. New size cut-offs are recalculated semi-annually. The ongoing reviews are meant to ensure that eligible new stocks are added to the index, and that existing stocks continue to meet criteria. To control portfolio turnover, buffers are used for existing constituents, so that they are not immediately removed upon falling out of line with any of the index’s entrance criteria. The index is highly concentrated within the Information Technology sector, which made up 32.8% of the total at the end of July. The next highest, Consumer Discretionary, had a 17.5% weighting. The top 10 positions make up less than 30% of the index. But that top 10 is quite top heavy, with Apple at an 8.9% weighting, more than twice as high as the next largest holding, IBM, at 3.4%.

Fondskonstruktion

The fund uses synthetic replication to provide exposure to the underlying benchmark, employing a combination of unfunded with funded swap structures in a ratio that can change over time. As of September 10th, 2012, 19.2% of the fund’s assets were in a funded swap, and the remaining 80.8% were in an unfunded swap. UBS provides full transparency on the swap collateral and substitute basket. In the funded swap portion, collateral consists of roughly 60% U.S. government bonds and 40% supranational bonds. The legal title of the collateral is transferred to the fund. In the unfunded swap portion, the substitute basket consists mainly of Japanese and European equities from a diverse set of industries. At the time of writing, the fund’s level of collateralisation against the swaps is 102.06%. Under the terms of the swaps, counterparty UBS AG agrees to provide the fund with exposure to the total return of the underlying index, net of any costs of fees associated with providing the exposure. The return from the swap assumes that all dividends paid by the underlying stocks are reinvested in the index. The fund does not pay out any dividend distributions. The fund is Irish-domiciled and has the U.S. dollar as its base currency. It has net assets of $298 million. The fund does not engage in securities lending.

Gebühren

The fund charges a total expense ratio (TER), including swap costs, of 0.73%. That’s a fair bit pricier than UBS-ETF MSCI USA SF-A, which has a TER of 0.12%. It’s also more costly than a number of alternatives referencing the NASDAQ 100 Index, another technology-heavy benchmark for U.S. growth stocks. Additional costs potentially borne by the unitholder but not included in the total expense ratio bid-ask spreads on the ETF and brokerage fees when buy and sell orders are placed for ETF shares.

Alternativen

To get exposure to large cap, growth stocks in the United States, there are a few choices, albeit referencing different underlying indexes. Possible alternatives include ComStage ETF NASDAQ-100, iShares NASDAQ-100, Amundi ETF NASDAQ-100, Lyxor ETF NASDAQ-100, CS ETF (IE) on NASDAQ 100, PowerShares EQQQ Fund, and Lyxor ETF Russell 1000 Growth. Of these, the PowerShares product is the largest, with assets of around $1 billion. The fund with the lowest total expense ratio is the Amundi fund, with a TER of 0.23%.