Rolle im Portfolio
The Lyxor Euro Corporate Bond ETF provides exposure to the EUR-denominated corporate bond market. Investors are attracted to investment-grade corporate bonds for the expected steady income at higher yields vis-à-vis government bonds of similar rating and an assumed lower risk profile vis-à-vis equity. The combination of yield pick-up and relative security makes this ETF a candidate to work as a building bloc of the fixed income share of an investment portfolio. Depending on the underlying market fundamentals, this ETF can also play a role as a satellite component within a portfolio in order to roll out tactical overweight bets, which might afford investors the means to enhance expected returns.
The vast majority of corporate debt issuers are located in developed economies. The index this ETF tracks (e.g. Markit iBoxx EUR Liquid Corporate) shows a rough 50/50 split between financial and non-financial holdings. The index restricts its bond universe to the most liquid issues, which tend to be from large-cap corporations with ratings not veering significantly from those of government bonds. This is likely to curb yield pick-up potential vis-à-vis ETFs tracking corporate bond market indices encompassing a wider universe and thus with a higher risk profile. As such, the yield-enhancing potential of this ETF would perhaps be best put to play against a risk-averse core fixed income portfolio made up of AAA-rated government bond ETFs, which would tend to offer the lowest yields within the broad government bond market.
Investors also have to take into consideration potential performance risks arising from inflationary pressures and their effect on monetary policy. Although the fund tracks an index encompassing both Eurozone and non-Eurozone issuers, it is EUR-denominated and so the focus lies on European Central Bank policy action. The ETF tracks an index with duration around 3.5-4.0 years.
Fundamentale Analyse
Investor interest in the corporate bond market has grown substantially since the onset of the financial crisis. The search for safety away from troubled government bond markets has pushed corporate bond yields – particularly those of non-financial corporations – down by a sizeable measure (e.g. EUR-denominated investment grade corporate bond yields stood at 2.50% on average in June 2013 vs. 7.20% in January 2009). However, despite this decline in yields, credit spreads (i.e. the yield difference to notional lower risk assets such as AAA-rated government bonds) have remained positive throughout. Bonds issued by financial corporations usually have the highest credit spreads, followed by industrial and utility.
This increase in investor interest in corporate bonds has taken place against a backdrop of increased issuance. The impairment of traditional banking lending channels since the onset of the global financial crisis has forced corporations to increase the share of open-market funding to meet their investment and debt refinancing goals. However, the increase in corporate bond demand has outstripped that in supply, hence the downward trend in yields.
Despite monetary authorities’ efforts to boost money supply and the taxpayer-funded cleaning up of banks’ balance sheets, the banking sector in the world’s developed economies continues to retain a fairly high level of aversion to fully re-opening the lending tap. The easing of financial market tensions in the Eurozone since H2-12 when the European Central Bank made an unequivocal commitment to defend the integrity of the Euro was an important step towards normalisation, but the general backdrop remains fraught with uncertainty. As such, above-average corporate bond issuance growth rates are likely for the foreseeable future. However, in the long run – assuming bank lending normalises and the Eurozone sovereign debt crisis is fully solved – one should expect some mean-reversion in corporate bond issuance metrics to kick in. This would mean an increase in yields.
As this ETF tracks an index with around 50% exposure to financial corporation bonds, of which a significant share issued by Eurozone-based financial institutions, special mention needs to be made of the efforts undertaken by the European Central Bank (ECB) to keep the inter-banking market rolling. Apart from conventional monetary policy measures (e.g. historically low interest rates, now with an explicit commitment to keep them so, or even lower, for an extended period), the ECB has routinely provided ample liquidity to the Eurozone banking sector at very favourable conditions via so-called “non-conventional measures” against an expanded list of accepted collateral. However, at this stage the common perception is that only a minority of this ECB funding has trickled down to real economic agents. An eventual withdrawal of the ECB special liquidity provision measures could contribute to boost financial corporate bond yields in the future. However, this would require full normalisation of conditions in the inter-banking market and the effective resumption of bank lending to economic agents. It seems fair to say that this still remains a distant prospect as we write.
Indexkonstruktion
The Markit iBoxx EUR Liquid Corporate Bond Index measures the performance of the most liquid EUR-denominated corporate bonds with investment grade rating, irrespective of issuing country. Liquid indices are subsets of iBoxx benchmark indices and are designed for derivatives and ETFs. Eligible bonds for this index must have a minimum remaining maturity of 1.5 years and minimum outstanding of EUR 750mn. The maximum number of bonds is 40, with no more than one bond from the same issuer. The index’s statistical weight split is a broad 50/50 between financials and non-financials. The maturity distribution of the index’s basket of constituents is strongly biased towards the short and medium-term. The Netherlands, UK and US tend to be the top three countries represented, with issues from these corporations located in these nations generally comprising around 50-60% of the index value. This reflects global trends in corporate bond issuance, with these three countries having a large pension fund customer base for this product. Index calculation is based on bid/ask quotes provided by contributing banks. Analytical values are calculated daily on closing prices. The index is weighted by market capitalisation. Coupon cash is invested at the end of each month in the money market at one-month LIBID (EURIBOR less 12.5 basis points). The index is rebalanced quarterly on the last calendar day of February, May, August and November.
Fondskonstruktion
Lyxor uses synthetic replication to track the Markit iBoxx EUR Liquid Corporate index. This ETF was launched in April 2004 and is domiciled in France. This ETF does not distribute dividends. Lyxor uses the unfunded swap model. The ETF buys a basket of securities (ie. substitute basket) from Societe Generale 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. The substitute basket for Lyxor’s range of fixed income ETFs is generally made up of EUR-denominated fixed income securities, both government-backed (e.g. sovereign, regional, agency) with a minimum rating of A- and corporate with a minimum rating of BBB-. The substitute basket may not to contain many of the bonds that make up the underlying index the ETF aims to track. A snapshot of the substitute basket as of this writing (e.g. mid July 2013) showed that its value was made up 53% of corporate bonds, 34% of government-backed bonds and 13% of covered bonds. The basket also contained over 50% of the constituents of the underlying index, although there was not a like-for-like replication of statistical weightings. In addition the basket also contained bonds not included in the underlying index. According to UCITS regulations, individual counterparty risk exposure is limited to 10% of the fund’s NAV at any point in time. According to our research, the OTC swap is not collateralised, which effectively exposes the investor to a loss of up to 10% of the NAV if the swap counterparty defaults. However, we understand that Lyxor targets zero swap exposure on a daily basis and is also considering the virtues of adopting an overcollateralised structure. Lyxor does not currently engage in securities lending.
Gebühren
The total annual expense ratio (TER) is 0.20%. This is average for ETFs offering exposure to the EUR-denominated corporate bond market. 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.
Alternativen
As we write and measured in terms of assets under management (AUM), Lyxor takes second place after iShares in the ranking of providers of broad EUR-denominated investment grade corporate bond ETFs in the European market. Two ETFs offered by iShares remain at the top of the table, with the iShares EUR Corporate Bond Large Cap ETF, tracking a Markit iBoxx index, well ahead in AUM terms with over EUR 3bn as we write by sheer virtue of a much longer run in the marketplace (e.g. it was launched in March 2003). Meanwhile, the iShares Euro Corporate Bond ETF, tracking a BarCap index encompassing a wider selection of components, is second in AUM terms with over EUR 2bn. Both iShares ETFs are physically replicated and charge a TER of 0.20%.
Further down in the AUM scale we find the Amundi Euro Corporates ETF (synthetic; TER 0.16%), the db x-trackers iBoxx EUR Liquid Corporate 100 (synthetic; TER 0.20%), the ETFlab iBoxx EUR Liquid Corporates Diversified (physical; TER 0.20%), the SPDR Barclays Capital Euro Corporate Bond ETF (physical; TER 0.20%), the UBS Markit iBoxx EUR Liquid Corporates (A) ETF (physical; TER 0.20%) and Think Capital iBoxx Corporate Bond Tracker (physical; TER 0.15%).
