Rolle im Portfolio
The focus of the iShares Euro Government Bond 1-3y ETF on the short-end of the government yield curve and its choice of liquid lines by the largest Eurozone issuers could make it a low-risk alternative to cash holdings in core portfolios for both institutional and retail investors. Current fundamentals continue to be characterised by a general low yield environment for government bonds, particularly for short-dated lines from top-rated Eurozone issuers, of which the index this ETF tracks has a strong focus.
Investors considering this ETF have to make sure they are comfortable with taking on the associated risks of tracking an index that is biased towards low investment-grade-rated Eurozone sovereigns. For example, during the most acute phases of the sovereign debt crisis episodes, short-dated government bonds issued by Eurozone peripheral debt agencies routinely faced substantial selling pressure on fears of default, thus negatively impacting the performance of tracking indices. Conversely, the decrease in financial market tensions with regards to the Eurozone debt situation has tended to benefit peripheral government bonds.
This ETF can also play a tactical role as a satellite holding to manage interest risk exposure of fixed income holdings spanning the entire yield curve. The ETF’s focus on the short-dated segment of the curve effectively allows for duration-shortening plays at times of rising interest rates. This would be perhaps better suited for investors with an ability to comprehensively monitor economic developments and their implications for ECB monetary policy.
Fundamentale Analyse
The Eurozone is now showing signs of an economic recovery. After six consecutive quarters of output falls, GDP has chained three consecutive quarters of mild growth out to end 2013. More importantly, the improvement is broad-based in geographical terms, with the beleaguered periphery also reporting positive readings. Forward-looking indicators suggest a gradual acceleration in the pace of recovery through 2014. However, expectations remain for a sustained period of sub-par performance. Meanwhile, despite significant improvements in competitiveness in the periphery, their private sectors remain hampered by the squeeze in bank lending.
Against this general backdrop, the ECB maintains a very accommodative monetary policy stance. The ECB has cut interest rates to a historically low of 0.50%, while explicitly signalling its intention to keep them at these, or even lower, levels for an “extended period of time”. This is entirely dependent on the outlook for price stability, which remains the ECB’s one and only policy objective. However, as the Eurozone inflationary outlook remains pretty subdued – in fact, some see risks of deflation – it can be argued that “extended” should mean “throughout 2014; possibly even longer”. The ECB also remains focused on the issue of financial stability, routinely providing ample liquidity at very favourable terms to the Eurozone banking sector.
The core-periphery dichotomy in bond pricing dynamics remains a key factor shaping the performance of ETFs providing exposure to the Eurozone government bond market. Severe market tensions in the summer 2012 forced the ECB President Draghi to announce that the central bank was ready to do “whatever necessary to ensure the survival of the Euro”. This declaration of intent was formalised in the Outright Monetary Transactions (OMT) programme, whereby the central bank would purchase unlimited amounts of government debt in the secondary market upon request from a government in exchange for this to adhere to a strict programme of reforms.
Mr Draghi’s verbal intervention has proved credible enough to allow for a significant decrease of tensions. The OMT programme has never been put to the test. However, peripheral bond yields have fallen substantially from their 2012 peaks, while their spreads to core bonds have more than halved by end 2013. In short, concerns about the long-term financial health of the Eurozone may remain; but financial markets have priced out the risk of a Euro break-up.
Overall, an improving economic backdrop, both domestic and global, should be increasingly unsupportive for government bonds. However, the post-crisis dichotomy in Eurozone sovereign bond dynamics means that, for now, any price falls in core issuers are likely to be offset by price increases in peripheral bonds until an equilibrium point is reached.
However, on a longer-term timeframe, the path of least resistance for bond prices firmly points south. In that situation the increased likelihood of capital losses should undermine the role of this ETF as a cash management vehicle. However, in this situation of rising yields and tighter monetary policy conditions, the tactical usage of this ETF (e.g. duration exposure management) would come into play.
Indexkonstruktion
The Barclays Euro Government Bond 1-3y Term Index is produced by Barclays Capital. Term indices are a Barclays Capital in-house indexing methodology which uses standard market capitalisation weighting on a bond universe made up of issues near their original maturity term rather than on all bonds within a specific maturity range. The objective of this particular index is to measure the performance of fixed rate conventional short-dated government bonds issued by the Eurozone’s major issuers (i.e. Germany, France, Italy, Spain and the Netherlands). The index is calculated on a daily basis using mid-market prices provided by Barclays Capital market makers towards the close of London trading. The index is reviewed and rebalanced on the last calendar day of each month. The index should contain a minimum of six bonds at re-balancing with a minimum outstanding of EUR 2bn and a minimum remaining life of 1.25 years. The maximum weighting of any one bond is capped at 30% of the index. Income arising from coupon payments is reinvested on a monthly basis at re-balancing, while up to such date it is invested at 1M Euro Libor -15bps set at the end of the month for the next month.
Fondskonstruktion
iShares uses physical replication to track the performance of the Barclays Euro Government Bond 1-3y Term Index. The restricted bond universe which Barclays Capital uses to construct its term indices allows iShares to fully replicate the index constituents in its fund. However, statistical weightings might differ slightly and this could impact on the fund’s tracking performance at the margins. Dividend distribution is done semi-annually, with historical data showing a March-September pattern. This ETF was launched in June 2006 and is domiciled in Ireland. As we write (e.g. mid January 2014), the fund holds short-dated government paper issued by Germany, France, Italy, Spain and the Netherlands. The fund’s composition shows a strong bias towards bonds issued by Italy (e.g. around 48%), followed by France (16%) and Spain (13%), the Netherlands and Germany (over 11.5% each). This distribution reflects short-dated issuance patterns for the countries making up the index. For example, France has tended not to be an active issuer of new short-dated lines over the last years, instead meeting a large share of market demand via taps of old medium-dated (e.g. 5y) benchmarks with residual maturity of around 2y. This makes these bonds ineligible to be part of the reference index and thus also of the fund. iShares may engage in securities lending in order to optimise the ETF’s tracking performance. BlackRock acts as investment manager on behalf of iShares. The amount of securities that can be lent is capped to 50% per fund. Lending operations are hedged by taking UCITS-approved collateral greater than the loan value and by revaluing loans and collateral on a daily basis. The collateral is held in a ringfenced account by a third party custodian. The degree of overcollateralisation is a function of the assets provided as collateral, but typically ranges from 102.5% to 112%. Lending revenue is split 60/40 between the ETF and BlackRock, respectively.
Gebühren
The annual total expense ratio (TER) for this ETF is 0.20%. This is towards the top-end of the TER range of 0.12-0.23% for ETFs for European ETF providers tracking indices biased to the short-dated segment of the Eurozone government bond market. It is worth noting that a majority of providers charge TERs in the 0.15-0.17% area. 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
The specificities of the index this iShares ETF tracks makes it difficult to find a like-for-like alternative in terms of country exposure. However, investors favouring maturity exposure over issuer have plenty of choices.
Measured in AUM terms, the Lyxor EuroMTS Investment Grade 1-3y ETF (TER 0.165%) and the db x-trackers iBoxx EUR Sovereigns 1-3 (TER 0.15%) are second and third to the iShares vehicle. The db x-trackers ETF is synthetic, while the Lyxor ETF switched to physical replication in May 2013. Both track indices which encompass a much larger investment-grade bond universe than the iShares ETF.
Other ETF providers lag behind in terms of liquidity, although most tend to compensate with lower TERs. Amongst these we find the Comstage iBoxx EUR Liquid Diversified 1-3 ETF (synthetic; TER 0.12%), the Amundi Government Bond EuroMTS Broad Investment Grade 1-3 ETF (synthetic; TER 0.14%), the SPDR Barclays Capital 1-3y EUR Government Bond ETF (physical; TER 0.15%) and the Deka iBoxx EUR Liquid Sovereign Diversified (physical; TER 0.15%).
Investors seeking exposure to the short-dated segment of the Eurozone bond market, but wanting to narrow country exposure can choose from a growing set of ETFs tracking individual Eurozone country sovereign bond markets (e.g. Germany, France, Italy).
