db x-trackers Euro Stoxx 50® Short Daily UCITS ETF 1C (CHF) | XSSX |
von
Hortense Bioy, CFA08.03.2013
Rolle im Portfolio
The db x-trackers EURO STOXX 50 Short Daily 1C should be viewed as a specialty satellite holding best suited for active traders who understand how inverse funds work. This fund can provide a very short-term hedge for investors looking to protect a portfolio consisting mostly of eurozone equities if the market falls. It can also be used as a short term trading tool and provide the opportunity to speculate on a decline of the eurozone equity market. This fund is not suitable as a buy and hold investment.
Prospective investors should understand the risks involved in inverse ETFs, especially the effects of path dependency and compounding on returns. Because of the daily compounding arithmetic, investors are not guaranteed to get the index's inverse return for any holding period longer than one day plus interest (based on EONIA) earned on the investment. As an example (ignoring earned interest), imagine that the EURO STOXX 50 falls from 100 points to 90 points in one day, a decline of 10%, and then climbs back to 100 the next day--an increase of 11.11%. On the first day, the fund should rise by 10% to 110 but then fall by 11.11% the next day to 97.78.
It should be noted that using this fund has a couple of advantages in comparison to shorting the EURO STOXX 50 index. This is an effective strategy for investors trapped in a long position during a prolonged bear market. By using this fund, they could avoid the taxes, spreads and broker fees that they would otherwise face if they sold their entire portfolio. Another advantage of buying this fundover shorting the index is that investors can’t lose more money than they have invested in it, unlike a traditional short position, which exposes investors to the potential for unlimited losses.
Fundamentale Analyse
Leveraged and inverse ETFs have attracted a lot of bad press over the past few years because of large losses experienced by investors who didn’t understand the effect of daily compounding and volatility on these funds’ long-term returns. However these funds have remained very popular as evidenced by the steady amount of assets under management and large daily trading volume.
European stock valuations in 2012 were mainly driven by the twists and turns of the Eurozone debt crisis, with fundamentals taking a back seat. As such, it proved a highly volatile, but ultimately good year.
After various failed attempts by the region’s politicians to tackle the debt situation, the European Central Bank (ECB) finally stepped up to the plate in summer 2012 with President Draghi making an unequivocal pledge “to do whatever it takes” to preserve the euro. This resulted in stocks rising and risk premia decreasing. The EURO STOXX 50 NR index gained about 18% in 2012, following a loss of 14% in 2011. However, the index is still about 28% below its pre-crisis highs.
Though the prevailing sentiment is that there is a strong political will to ensure the survival of the Euro project, there remain fundamental economic problems to address. In particular, pending long-term solvency issues within the Eurozone periphery continue to threaten to infiltrate to the core, and growth in previously better performing countries like Germany and France is slowing.
The Euro area economic activity steadily deteriorated through 2012, ending the year with a fall in GDP of 0.6% y/y. The outlook for the region’s economy remains subdued, with the ECB predicting a 0.3% contraction in 2013. While a gradual improvement of the world economy is likely to support European exports despite the recent appreciation of the euro, domestic demand is bound to remain very weak as fiscal austerity measures and rising unemployment take their toll on household consumption.
Meanwhile, political risks will continue to play an important role in investor sentiment in 2013, as evidenced by February’s inconclusive election in Italy. The political gridlock has reignited fears the Euro area’s debt crisis may resurface. Spain’s political situation is also closely watched as accusations of corruption are putting fresh pressure on the government amid an increasing sense of weariness over the slow pace of the economic recovery in the country. Finally, there are federal elections in Germany due to be held in the autumn.
Despite the series of policy actions taken by the ECB to help stabilise the financial system since the start of the crisis, banks --EURO STOXX 50’s top sector-- remain under pressure against a backdrop of fragile mid- to long-term funding conditions, generally difficult operating conditions, and increased regulatory burdens. Deleveraging remains a longer-term structural theme for the banking sector.
Indexkonstruktion
The EURO STOXX 50 Short Daily index is an index which aims to provide the inverse return of the EURO STOXX 50 Net Return index plus interest (based on EONIA) earned on the investment. The EURO STOXX 50 index includes 50 companies. To be eligible for inclusion a company must be headquartered in a country of the EMU. The index is weighted by free-float adjusted market capitalisation, with each component capped at a maximum of 10% of the index’s overall value. Full reviews are done in September of each year, but there are criteria which can turn over components sooner, such as a merger, bankruptcy or a constituent otherwise slipping from the ranks of the top 75. The banking sector is the biggest sector represented, comprising 13-15% of the index's value, followed by industrial goods & services (11%) and chemicals (9-10%). French and German companies account for more than two thirds of the index. Spanish and Italian companies represent another 20-23% and the remainder is spread amongst another eight countries. The index is fairly well-balanced from a single stock perspective. Sanofi is the largest component of the EURO STOXX 50 with a 4-6% weighting. The second and third largest stocks represented are Total and Siemens.
Fondskonstruktion
The db x-trackers EURO STOXX 50 Short Daily 1C uses synthetic replication to track the performance of the EURO STOXX 50 Short Daily index. To achieve this return, the fund invests in a fully-funded swap with parent company Deutsche Bank. Under this swap agreement, the proceeds of fund holders’ investment in the ETF are transferred to the swap counterparty in exchange for the performance of the index. To mitigate counterparty risk, db X-trackers requests that Deutsche Bank post collateral in a segregated account with custodian State Street Bank Luxembourg in Deutsche Bank’s name and pledged in favour of the fund. Haircuts are applied to the collateral's market value (7.5%-20% for equities, 10% for corporate bonds and 0% for government bonds), which results in overcollateralisation of the fund. Collateral is reviewed daily by third party State Street Global Advisors (SSgA). Should Deutsche Bank default, the ETF may be terminated, the pledge enforced without giving prior notice to Deutsche Bank, and the collateral liquidated. As of this writing, the fund's collateral is made up at 88% of OECD equities, predominantly from Japan, Europe and the US, and the remaining 12% consists of various other types of securities. The collateral value is equivalent to 119.9% of the fund's NAV. The db x-trackers EURO STOXX 50 Short Daily 1C is a capitalising fund.
Gebühren
The ETF charges a total expense ratio (TER) of 0.40%. It's at the high end of the range for inverse EURO STOXX 50 ETFs, but does have the added value of having the greatest on-exchange average daily trading volume of those ETFs. Other costs potentially borne by the fund shareholder but not included in the TER include swap costs, bid-ask spreads on the ETF and brokerage fees when buy and sell orders are placed for ETF shares.
Alternativen
ComStage and Amundi offer cheaper alternatives to this fund with TERs of 0.35% and 0.30%, respectively, but these fees come at the expense of lower liquidity. As these leveraged funds are only appropriate for short holding periods, investors should probably focus more on considerations such as trading costs and tracking error than annual fee differences of 5 or 10 bps. Higher liquidity may allow ETF trades to be executed at tighter bid-ask spreads.
For a TER of 0.50%, db x-trackers also offers a double-short EURO STOXX 50 ETF, giving exposure to twice the inverse return of the EURO STOXX 50. Alternatively, the Boost EURO STOXX 50® 3x Short Daily ETP, which provides 3 times the daily perfomance of the index for a TER of 0.80%. However, investors should be aware that the use of leverage will increase their risk exposure and can lead to greater losses.
