The Comstage EONIA Index TR ETF is a money market ETF offering investors the possibility to invest cash holdings without incurring a significant level of risk. The main objective is one of providing a bullet-proof and highly flexible vehicle to invest cash on fairly short-term horizons. The trade-off is one of returns, with money market funds in general aiming at best to marginally better prevailing money market rates. In the case of this Comstage ETF, the objective is that of replicating the return of a rolling deposit invested daily at EONIA (i.e. the overnight reference rate for the Euro computed as a weighted average of all overnight unsecured lending transactions undertaken in the banking system).
The Comstage EONIA Index TR ETF could play a role as a core holding in an investment portfolio as a near-perfect substitute for outright cash positions. Some investors may also see money market funds as a vehicle to neutralise the so-called “cash drag” (e.g. the diminishing effect on overall returns of holding rather than investing cash). Investors wanting to make use of a money market ETF for cash management purposes will have to carefully consider whether the returns on offer are financially attractive relative to alternative vehicles measured against key economic variables (e.g. interest rates, inflation).
The appeal of this ETF as a cash management instrument is enhanced by its daily real-time tradability, generally at lower costs than traditional money market funds. This could make this ETF a useful tool for institutional investors with an active need to financially optimise the use of cash holdings. Meanwhile, for retail investors, a key appeal of this ETF is likely to be as an alternative to bank deposits. In general, retail investors are likely to consider money market ETFs on longer-time horizons than institutional investors.
The Eurozone’s economic performance progressively deteriorated through 2012, with falls in output recorded from Q2 to year-end. Expectations for 2013 are for a fairly modest performance – clearly below that of the US and emerging markets – as Eurozone economies remain committed to austerity policies. Although the slowdown is general to all Eurozone national economies, there remains a clear performance gap between the export-oriented Northern economies and the private-demand-dependant Periphery, with the latter espousing high unemployment rates. And yet, despite not a particularly bright general outlook, the fact is that perceptions about the Euro have changed for the better since the European Central Bank (ECB) verbalised an unequivocal commitment to ensuring its survival.
The Eurozone has experienced a distinct lack of inflationary pressures since the start of the economic crisis. This has allowed the ECB to keep a very accommodative policy stance, with interest rates at historical low levels since May 2009 to date, bar a short-lived period in 2011. The deterioration of economic conditions in 2012 – not to mention the damaging effects of the Eurozone sovereign debt crisis – led the ECB to bring rates further down in July 2012, with the refi rate cut to 0.75% and the deposit rate to 0.00%. These levels remain in place as of this writing. Expectations are for very loose monetary settings to remain in place for the foreseeable future, not least as inflation expectations remain in check with the ECB’s price stability target of an HICP rate of around 2.0% y/y.
Relevant money market rates have broadly tracked the movements in ECB interest rates. EONIA went down from an average of close to 3.9% in 2008 to 0.71% in 2009 and further down to 0.44% in 2010. It picked up to 0.87% in 2011 to reflect the effects of the ECB’s short-lived tightening cycle. However, EONIA resumed a clear downward trend into 2012, finishing the year at an average of 0.23%.
Aside from conventional monetary policy measures, the ECB remains focused on the issue of financial stability by routinely providing ample liquidity at very favourable terms to the Eurozone banking sector. The impairment of interbank lending channels since the start of the crisis has had a direct effect on EONIA. Before the crisis, EONIA used to track the ECB’s main refi rate. However, with interbank lending frozen, commercial banks have been parking their cash en masse with the ECB. As a result, EONIA now tracks the much lower ECB deposit rate, currently at 0.00%, with obvious consequences on the performance of any EONIA-tracking financial instrument.
The lowering of the ECB deposit rate to 0.00% was seen as move from to kick-start the interbank lending market. Meanwhile, the improvement of perceptions vis-à-vis the Euro has also produced some positive developments (e.g. commercial banks becoming less reliant on ECB funding). However, full resumption of normal lending practices still remains a somewhat distant prospect. As such, EONIA is likely to continue tracking the ECB’s deposit rate for the foreseeable future.
The Commerzbank EONIA Index is produced by Commerzbank. It measures the total return of a rolling deposit invested daily at EONIA (i.e. the overnight reference rate for the Euro computed as a weighted average of all overnight unsecured lending transactions undertaken in the banking system). The index was launched on August 2008 with a level of 100 and EUR as the base currency. It is calculated on each banking day by Commerzbank AG and published at www.comstage.de.
EONIA is sponsored by the European Banking Federation (EBF), which represents the interest of some 5000 European banks, and by the Financial Markets Association (ACI). EONIA is computed with the help of the European Central Bank (ECB). The banks contributing to EONIA are the banks with the highest volume in the Eurozone money markets. The panel of banks contributing to EONIA currently consists of 49 banks. Since its launch in January 1999, EONIA has become the underlying rate of numerous financial derivatives.
Comstage uses synthetic replication to track the performance of the Commerzbank EONIA index. This ETF was launched in September 2008 and is domiciled in Luxembourg. Comstage uses the unfunded swap model. The ETF acquires a basket of securities (i.e. substitute basket) from Commerzbank 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.
Comstage ETF’s substitute basket are normally made up of European blue-chip stocks; normally constituents of Germany’s DAX, the Euro Stoxx 50 or the Stoxx Europe Large 200 indices. The substitute basket is held in a segregated account at a custodian bank and monitored daily by Comstage’s management company Commerz Funds Solutions SA, a subsidiary of Commerzbank, as well as by the custodian bank.
According to UCITS III regulations, individual counterparty risk exposure is limited to 10% of the fund’s NAV at any point in time. It is our understanding that Comstage’s swap counterparty (e.g. Commerzbank) is requested to post high-quality collateral equivalent to 105% of the swap value. This collateral is held in a segregated account. Comstage has a generic policy of re-setting swaps to zero on a quarterly basis, unless risk exposure gets close to the legally-mandated limit or in the case of substantial creations or redemptions of fund shares.
Comstage engages in securities lending in order to raise additional income to keep overall management costs in check. Comstage requires the borrowers of securities to post collateral equivalent to 100% of the loan value. Our understanding is that the income raised less the lending fee paid to Commerzbank as market-maker reverts back to the ETF.
The annual total expense ratio (TER) for this ETF is 0.10%. This is the low-end of the 0.10-0.15% TER range for ETFs providing Eurozone money market exposure. Additional costs potentially borne by investors and not included in the TER include bid/offer spreads and brokerage fees when buy/sell orders are placed for ETF shares.
There is no shortage of like-for-like alternatives to this Comstage money market ETF, with the majority of European swap-based ETF providers also opting to track indices reflecting the return of deposits invested in EONIA. However, within this particular subset, Comstage charges the lower TER versus the longer-running and much larger (in terms of assets under management) db x-trackers II EONIA TRI ETF (TER 0.15%) and Lyxor Euro Cash ETF (TER 0.15%). Lagging Comstage in AUM, and also charging a higher TERs, we find the Amundi EONIA ETF (TER 0.14%) and Credit Suisse’s EONIA ETF (TER 0.14%).
The PIMCO Source Euro Enhanced Short Maturity Source ETF is an actively managed ETF aimed at outperforming EONIA by investing in a higher-yielding mix of corporate and government bonds with short maturity. The price for active management comes in the shape of a TER of 0.35%.
Investors looking for alternative ways of measuring the performance of the Eurozone money market may consider the iShares eb.rexx Germany Money Market ETF (TER 0.12%). This physically-replicated fund tracks an index measuring the performance of German government bonds with very short residual maturity. Following the same strategy, we find ETFlab’s Deutsche Boerse EUROGOV Germany Money Market ETF (TER 0.12%). Meanwhile, the Amundi Cash 3M EuroMTS Investment Grade (synthetic; TER 0.14%) and the PowerShares EuroMTS Cash 3M ETF (physical; TER 0.15%) track an index that measures the performance of the broad Eurozone government T-bill market.