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Analyse: Lyxor UCITS ETF EuroMTS Highest Rated Macro-Weighted Govt Bond

Dieser Bond-ETF umfasst nur die top-gerateten Schuldner der Eurozone und ist zudem nach vier Makroökonomischen Faktoren gewichtet. Sicherheit steht hier also vor Rendite.

Jose Garcia-Zarate 21.02.2014

Rolle im Portfolio

The Lyxor EuroMTS Highest Rated Macro-Weighted Government Bond ETF – previously Lyxor EuroMTS AAA Government Bond - offers investors exposure to the entire maturity spectrum of top-rated Eurozone government bonds. The ETF tracks a fundamentally-weighted index which assigns individual country weights on the basis of a series of key macroeconomic indicators. This aims to address commonly cited pitfalls of market capitalisation fixed income indices such as the over-exposure to heavily indebted constituents.    

The restriction in terms of credit rating and the reference to a macro-weighted fixed income index afford this ETF something of a dual role in a Eurozone-centric investment portfolio. Investors with low tolerance to risk are likely to use it as a core fixed income building block, offering the necessary counterweight to Eurozone equity fund exposure; particularly useful at times of economic downturn. Meanwhile investors with a more daring attitude to risk may prefer to use it as a satellite component, a sort of hedge or cushion to a core made up of an ETF encompassing all Eurozone issuers irrespective of credit standing.

This ETF can also work tactically, either as a complement or a hedging tool for investment portfolios with exposure to other geographical areas within the fixed income universe (e.g. UK, emerging European markets). However, foreign exchange considerations would need to be taken into account, particularly so if the ETF is to be used as part of a hedging strategy.

Exposure to the entire maturity spectrum makes this ETF best suited to shield the overall investment portfolio against negative performance effects arising from market shifts across the yield curve, whether near-term tactical or long-term strategic in nature.

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Fundamentale Analyse

Sovereign risk has been the key factor shaping pricing dynamics in the Eurozone government bond market since late 2009. The political management of the Eurozone debt crisis, although rather haphazard, has produced some relevant events such as the creation of financing vehicles such as the European Stability Mechanism (ESM); the approval of the “Fiscal Compact” binding 25 EU countries to a stringent set of fiscal responsibility rules, and the first steps towards some kind of Eurozone banking union with the European Central Bank (ECB) as supervisory entity.

Despite these relevant political moves, perceptions of sovereign risk within the Eurozone have changed significantly; possibly for good. We have gone from a pre-crisis situation where markets happily adhered to the notion of almost perfect substitution between sovereign bonds of Eurozone issuers, to one where bonds from the peripheral issuers carry a much higher risk premium vis-à-vis the German Bund and other top-rated issuers. In fact, spreads between Germany and the rest of the core Eurozone countries have also widened from pre-crisis levels, thereby cementing Germany’s lynchpin status in the Eurozone government bond market.

Overall, this risk pricing dynamic is expected to be maintained in a post-crisis scenario. In fact, peripheral bond yields have fallen significantly from their summer 2012 peaks and may still have room for further downside. However, although core bond yields have started to trend upwards on a more sustained basis, cross-country spreads should be expected only to narrow to a fair value level above pre-crisis valuations.

The fall in peripheral yields has come courtesy of the ECB President Mario Draghi’s verbal intervention in July 2012 to do “whatever necessary to ensure the survival of the Euro”. This declaration of intent was later 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 supervised by the EU and IMF. The OMT programme has never been put to the test. However, financial markets have effectively priced out a Eurozone break-up scenario.

Diverging perceptions of sovereign risk have also been influenced by the disparities in economic performance between the core and the periphery. Despite improving macroeconomic conditions in the Eurozone as a whole into 2014, core economies such as Germany are expected to continue outperforming a Eurozone periphery undergoing severe programmes of budgetary consolidation.

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”.

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Indexkonstruktion

The EuroMTS Highest-Rated Macro-Weighted Government index measures the performance of the Eurozone’s top-rated conventional government bonds with minimum maturity of one year quoted on MTS platforms. Eligible bonds must have at least two AAA ratings from the three main rating agencies and a minimum outstanding of EUR 2bn. The index must have a minimum of five countries. If a country is downgraded and its exclusion means the index would be left with less than five issuers, then such country remains in the index until a new country is upgraded to take its place. As we write eligible countries are Germany, France, Netherlands, Austria and Finland. Each is represented by all the bonds meeting the eligibility criteria. Country weights are based on GDP data and then adjusted by applying the average of the standardised figures of four macroeconomic indicators as a premium or discount depending on whether the aggregate metric is positive or negative. The adjustment factor is calculated on data for the last available eight quarters on government debt (% of GDP), current account balance (% of GDP), quarterly GDP growth and long-term interest rates. Macro data is updated quarterly, while individual bond weights are adjusted monthly due to changes in market capitalisation. This is a total return index with coupons reinvested overnight. Calculations are done in real time with three price fixings in the trading session using MTS system bid prices. The index is rebalanced monthly.

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Fondskonstruktion

The Lyxor EuroMTS Highest Rated Macro-Weighted Government Bond ETF was launched in April 2009 and is domiciled in France. Up until December 2012, Lyxor used synthetic replication (e.g. unfunded swap model) to track the performance of the benchmark index. However, from December 2012 onwards, this ETF uses physical replication. The ETF does not distribute dividends. Lyxor uses full replication to track the performance of the EuroMTS Highest-Rated Macro-Weighted Government Bond index. By definition, the ETF basket will contain all of the reference index components, while keeping the overall statistical distribution, both by issuing country and maturity segment. However, minimal differences in components’ statistical weightings between the ETF and the index may occur. As we write (e.g. mid Jan 2014), the fund is biased to German government bonds (e.g. close to 50% of the basket), with France following at around 33% and the Netherlands with 10.5%. In terms of maturity, the ETF shows a broad three-way short-medium-long dated split. The ETF will not invest in financial derivative instruments, except in bond and/or index futures which may only be used on an ancillary basis and within regulatory limits. This Lyxor ETF does not engage in securities lending.

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Gebühren

The annual total expense ratio (TER) for this ETF is 0.165%, at the top-end of the 0.14-0.165% range for the existing offering of ETFs providing exposure to the performance of the restricted universe of AAA-rated Eurozone government bonds. 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.

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Alternativen

 

The Lyxor EuroMTS Highest Rated Macro-Weighted Government Bond ETF came to the marketplace almost a year ahead of any of its competitors and retains a leading position in AUM terms.   

 

Alternatives include the db x-trackers iBoxx EUR Sovereigns Eurozone AAA (TER 0.15%) and the Amundi ETF AAA Government Bond EuroMTS (TER 0.14%); both swap-based ETFs tracking market capitalisation-based indices. However, the db x-trackers ETF now excludes French government bonds. A physically replicated alternative to the Lyxor ETF is the Think Capital AAA-AA Government Bond ETF (TER 0.15%).

 

Those looking for similarly liquid alternatives to the Lyxor ETF but unwilling to compromise on the highest possible credit rating and broadest exposure to the maturity spectrum may consider the array of ETFs offering exposure to the German government bond market. Amongst these, the iShares eb.rexx Government Germany (TER 0.15%) and the Deka Deutsche Boerse EUROGOV Germany (0.15%) are the most popular in AUM terms. Both are physically replicated. Other German-centric alternatives include the db x-trackers iBoxx EUR Germany (synthetic; TER 0.15%) and the Source PIMCO German Government Bond ETF (physical; TER 0.15%).

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Über den Autor

Jose Garcia-Zarate  is an ETF analyst with Morningstar UK.