Analyse: db x-trackers Russell 2000 UCITS ETF

Klein-kapitalisierte US-Unternehmen haben den großen in den vergangenen Jahren den Rang abgelaufen. Die Bewertungen im Index Russell 2000 reflektieren diese Outperformance inzwischen allerdings überdeutlich.

Gordon Rose 14.02.2014

Rolle im Portfolio

The db X-trackers Russell 2000 ETF provides equity exposure to US micro- and small-caps, representing about 10% of the market capitalisation of the broader RUSSEL 3000 Index. The Russell 2000 index correlated 87% with the S&P 500 Index and 86% with the MSCI World USD Index over the last three years; hence its usefulness as diversifier within a broader equity allocation appears limited.

As the Russell 2000 Index is well diversified across individual holdings and sectors, the ETF can best be deployed as a core holding complementing other US mid and large cap holdings. The ETF is suitable for investors believing in an improving US economy, especially one driven by growing domestic demand.

For tactical purposes, this ETF might be suitable for investors believing that large caps will unload their cash reserves through acquisitions in the hunt for external growth targeting small- and mid-cap companies.

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Fundamentale Analyse

The Russell 2000 Index has outperformed large cap indices over the last ten years. The index had an annualised return of 7.4% over that time period, compared to 6.0% for the S&P 500 Index and 6.1% for the MSCI World USD Index.

Small cap valuations exceeding their peak reached in April 2011, when they already appeared to be far more expensive based on their price-to-earnings multiple compared to large caps. As of this writing, the Russell 2000 Index is trading at a P/E multiple of 20.8 compared to 18.6 for the S&P500 Index. However, coming out of a recession, many large companies are sitting on huge cash reserves after several quarters of cost-cutting. In the hunt for growth, they will target more often than not small- and mid-cap companies as acquisition candidates.

The Russell 2000 Index is more heavily biased towards financial stocks and less exposed to energy stocks as compared to the S&P 500 Index. The small-cap index favours regional banks that are reliant on mortgage lending. Therefore, an improving US housing market and falling oil prices could benefit the performance of the Russell 2000 Index relative to the S&P 500 Index in the near term.

A supportive environment for small caps has been created by expansionary monetary and fiscal policies. Since the mid 1930s, small caps have returned 19% on an annualised basis--about a 10 percentage point annualised outperformance as compared to large caps—during periods of negative real short-term interest rates, i.e. low nominal interest rates coupled with high inflation. Those periods are usually the product of a broader crisis, during which large-cap companies will seek to cut costs and preserve cash, leaving them with huge cash reserves as mentioned before. During the following quarters, many of these same companies unload their cash by acquiring small caps, hence explaining a portion of the outperformance of small caps in such circumstances. During the latest period of negative real interest rates (beginning in December 2009) US small caps have outperformed large caps by 4.4 percentage points on an annualised basis.  

The outlook for the US economy has improved to the point of getting closer to a full recovery from the financial crisis. The consensus forecast is for GDP to grow by at least 3% in 2014. It is also expected that the 8.7 million jobs lost during the crisis will be fully regained by H2 2014, as the economy has added 2.1 million jobs on average over the last three years. The unemployment rate has dropped to 6.7% from a record-high of 10% in October 2010. However, wage growth has not kept up pace with job creation. According to surveys, 40% of the population classify themselves as lower or lower-middle class. In theory, this could hamper consumer spending, as domestic demand accounts for roughly two thirds of GDP. However, it must be pointed that the consumer confidence index rose to 80.7 in January after averaging out at 73.3 in 2013, while retail sales were up 4.2% in 2013 – its third consecutive annual increase.

Morningstar forecasts 2.0%-2.5% GDP growth for 2014 on expectations of a rough first quarter. In fact, the US PMI has dropped to 53.7 in January from 55.0 in December, as the government’s mini-stimulus of summer 2013 gradually phases out.

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The Russell 2000 Index is a sub-index of the Russell 3000 Index, representing the bottom 10% of companies as measured by market capitalisation of the broader Russell 3000 Index. The index holds around 2000 of the smallest publicly traded companies in the US and is constructed to provide a broad and unbiased small-cap indicator. The constituents are selected based on a combination of market cap and current membership of the Russell 3000 Index. The index is reconstituted annually to account for market performance. The index is well diversified across different sectors. As of this writing, the biggest sector allocation is financials (23% of the index’s value), followed by IT (18%) and industrials (15%). On an individual security level, the biggest exposure is Costar Group Inc. (0.31%) making it apparent that the index has very little risk to any single issuer.

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The db X-trackers Russell 2000 uses swap-based replication methods to track the Russell 2000 Index. To achieve this return, the fund invests in a basket of securities and enters an un-funded swap agreement with parent company Deutsche Bank. The bank then gives away the performance of the Russell 2000 (net of fees) in exchange for the performance of the fund’s basket of securities. The marked-to-market value of this basket is reviewed on a daily basis to ensure that it doesn’t fall under regulatory limits. In line with UCITS III requirements, counterparty exposure mustn’t exceed 10% of the fund’s NAV, i.e. the substitute basket must represent at least 90% of the fund’s NAV at all times. In reality, db x-trackers resets swaps to zero whenever (i) the exposure to the swap counterparty reaches 5% of the fund’s NAV and/or (ii) whenever there is a subscription/redemption at the fund level. Resetting swaps to zero eliminates (temporarily) counterparty exposure. db x-trackers doesn’t engage in securities lending within this ETF, which limits counterparty risk. The fund’s substitute basket typically consists of highly liquid blue chip stocks from OECD countries, including European, US and Japanese equities. It is held in ring-fenced accounts at the funds’ custodian, State Street Bank Luxembourg or the funds’ collateral manager, Bank of New York Mellon Luxembourg and reviewed daily by State Street Global Advisors (SSgA).

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The fund levies a total expense ratio of 0.45%, which is at the upper end of the range for ETFs tracking US small caps. Other potential costs associated with holding this fund which are not included in the TER include swap fees, bid-ask spreads and brokerage fees.

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As of writing, there are a few providers offering ETFs which provide exposure to US small cap indices. The largest in terms of total assets under management is the iShares S&P Small Capp 600 (DE), tracking the S&P Small Cap Index which has 600 constituents. iShares uses optimised sampling in order to achieve its investment objective. This approach could lead to a higher tracking error, especially in adverse market conditions.

Investors looking for a more like-for-like alternative will find an ETF from Source, tracking the Russell 2000 Index. This ETF uses synthetic replication and levies a total expense ratio of 0.45%.

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Über den Autor

Gordon Rose  ist ETF-Analyst bei Morningstar.