Lyxor ETF LevDAX (EUR) | LYLVD |
von
Gordon Rose, CIIA19.04.2013
Rolle im Portfolio
Lyxor ETF LevDAX can provide leverage to investors who are particularly bullish on the very near-term prospects of the German equity market. This fund tracks the LevDAX index, which provides daily exposure equal to double the return of the DAX Total Return index. So, if the index goes up 1% during a given trading day, the fund will go up 2%, and vice versa.
Investors should understand the risks involved in this leveraged fund, especially the effects of daily compounding and volatility on its returns. Because of the daily rebalancing and the compounding arithmetic, investors are not guaranteed to get double the index's return for any holding period longer than one day. This issue is generally amplified in periods of high market volatility and can lead to greater losses than anticipated.
This fund can be used as an alternative to taking out a margin loan to achieve leveraged exposure to the DAX. One drawback of investing on margin is that the leverage of a position will increase if the investments decrease in value, which makes it easier for a double leveraged investment on margin to be wiped out by a series of large losses. Symmetrically, the leverage of a position will decrease if the investment increases in value, which can make investors wonder why their returns are less than double the DAX’s returns after a series of gains. Because Lyxor ETF LevDAX tries to match the return of the benchmark on a daily basis by rebalancing the position, the leverage remains the same over time. So this fund may yield returns closer to twice the index return from period to period than a margin account that ignores rebalancing. Another drawback of buying on margin is margin requirements, e.g. investors must post collateral, whereas this fund requires no collateral and as such will not have a potential impact on the other portions of an investor’s portfolio. With this product, investors can never lose more than their original principal whereas equivalent margin positions expose the investor to theoretically unlimited losses. Thus, Lyxor ETF LevDAX provides a little extra safety versus investing on margin in the face of potentially large losses.
Fundamentale Analyse
Leveraged 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 leveraged ETFs have remained very popular as evidenced by the steady amount of assets under management and large daily trading volume.
The short- to mid-term economic outlook for heavily export-oriented Germany has deteriorated. Stubbornly high unemployment and falling manufacturing activity threatening the recovery of the Eurozone, and the slowdown in Emerging Market economies – in particular China – in the first quarter of 2013 have taken its toll on the once resilient largest economy in Europe.
Economic data have been somewhat mixed. Industrial output in the Eurozone rose by 0.4% in February, although it rose by 0.9% in Germany. However, a sharp downward revision of Germany’s January data muted the Eurozone picture, hinting to a slower than expected recovery. Also, unemployment in the Eurozone remains at its highest level since the euro’s creation, reaching 12% in February. Meanwhile unemployment in Germany remains at a low 5.4%. Some data indicate that the Eurozone contracted again in the first quarter of the year. The PMI for the Eurozone dropped further into contraction territory at 46.5 in March, while Germany’s PMI (50.6) remained just above the 50 threshold separating contraction from expansion. As a result of rather weak economic data, the German government’s economic advisor cut the GDP growth forecast for 2013 from 0.8% to 0.3%.
Further sentiment data has added to concerns on the overall health of the German economy. In April, the ZEW index dropped for the first time in five months from 46.5 to 36.3; well below market expectations for a milder fall to 43.0. According to ZEW, the sharp decline in sentiment was consistent with the release of economic data also falling short of expectations
Additional factors likely weighing on sentiment include a weaker Japanese yen impacting the external competitiveness of Germany’s high-end manufacturers, and a slowing Chinese economy.
Germany’s Bundesbank also contributed to the generally gloomy outlook by cutting its GDP growth forecast, partly on the negative effects of the still recessionary state of the Eurozone’s peripheral countries. By contrast, despite the weak data, the IMF has raised its 2013 GDP growth forecast slightly to 0.6% from a previous 0.5%.
Looking forward and taking into consideration the export-oriented nature of its economy, Germany could benefit from any improvement in the outlook of the US and Asian economies, despite a recent slowdown in China.
Companies in the basic materials sector, the largest sector in the DAX, generally operate in a highly cyclical environment and are subject to fluctuating commodity prices. Rising raw material costs can put pressure on these firms’ margins and dampen demand. However, any deterioration of the Eurozone sovereign debt crisis should put downside pressure on the euro, in turn providing support to exports.
Indexkonstruktion
The LevDAX Total Return index tracks 200% the daily performance of the DAX Total Return index with the support of short-term financing (borrowing at the EONIA interest rate). The DAX index comprises the 30 largest companies trading on the Frankfurt Stock Exchange and represents approximately 80 % of the free-float adjusted market capitalisation of the Prime Standard Segment. The value of the DAX is based on free-float market capitalization and trading volumes. The weighting of an individual constituent is limited to 10% of the index’s value. The index weightings are reviewed quarterly and the index’s composition is reviewed once a year in September. The DAX is one of the few major country indices that is calculated on a total return basis, i.e. dividends are constantly reinvested into the index. Basic materials is the primary sector represented, with 25% of the index's value, followed by consumer goods (19%), financials (17%), and industrials (14%). Bayer is the largest component of the DAX with a 10% weighting. Rounding out the top three constituents are Siemens and BASF.
Fondskonstruktion
Lyxor ETF LevDAX seeks to provide daily exposure equal to twice the return of the DAX. So, if the index goes up 1% during a given trading day, the fund will go up 2%, and vice versa. However investors are not guaranteed to get double the index's return for any holding period longer than one day, because of the daily rebalancing and the compounding arithmetic. Imagine that the DAX gains 5% one day, then loses 5% the next, and repeats this for 10 trading days. At the end of two weeks, it will be trading at 99% of its initial value. However this fund, which would have had daily movements of 10%, would finish the period at 95% of its initial value. Lyxor ETF LevDAX will provide returns approximating double the return on the DAX over lengthy periods only if the index trends consistently upwards or downwards (i.e. exhibits lower volatility during a given holding period). Borrowing costs (at the EONIA rate) will further affect the performance of the LevDax index especially over periods longer than one day. The fund attempts to achieve the daily desired return by holding a basket of European securities and entering a swap agreement with a counterparty, which more often than not is Societe Generale. The counterparty then gives away the daily desired return in exchange for the performance of the fund’s holdings According to UCITS III regulations, individual counterparty risk exposure is limited to 10% of the fund’s NAV at any point in time. However, Lyxor has a daily target of zero swap exposure. Swaps are reset whenever their value becomes positive. They may sometimes have a negative value (between -2% and 0%), which would mean in this case that the fund owes the counterparty money. The fund’s holdings consist of highly liquid equities from OECD countries, the large majority of which are European. Lyxor does not engage in securities lending within the fund, which helps to minimise overall counterparty risk.
Gebühren
The fund levies a total expense ratio of 0.40%, which is at the top-end of the range for ETFs offering leveraged exposure to the DAX. Other potential costs associated with holding this fund which are not included in the TER include swap costs, bid-ask spreads and brokerage fees.
Alternativen
Lyxor ETF LevDAX is currently the largest leveraged fund tracking the DAX in Europe as measured by assets under management. It is also the most widely-traded as measured by the 3-month average daily volume, a key (but by no means comprehensive) measure of liquidity.
db x-trackers and ETFX offer alternatives to this fund. In both cases, the TER is lower (0.35% for db x-trackers LevDax Daily ETF 1C and 0.40% for ETFX DAX 2x Long Fund), but these fees come at the expense of lower liquidity.
Moreover, RBS offers monthly leveraged long ETF on the DAX which mitigates partly the compounding issues intra-month. This ETF levies a TER of 0.6%.
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 differences in annual fees of 5 or 10 bps. Higher liquidity may allow ETF trades to be executed at tighter bid-ask spreads.
