Update: Source STOXX Europe 600 Optimised Banks

Wer von einem Come-back europäischer Banken überzeugt ist und dennoch nicht zu stark auf die riskanteren Institute aus der Eurozone setzen will, bekommt mit diesem Sektor-ETF einen Zugang zu den liquidesten Aktien des Sektors.

Caroline Gutman 14.11.2014

Rolle im Portfolio

The Source STOXX Europe 600 Optimised Bank UCITS ETF provides access to many of the largest and most liquid bank stocks in Europe. Because of the narrow focus, it should be used as a tactical tool to express a view on European banks. The 2008 financial crisis and the subsequent eurozone sovereign debt crisis have shown how quickly large and highly leveraged financial institutions can find themselves in treacherous waters. With this type of investment, caution is therefore required. That said, this particular index is constrained so that the weight on any individual stock is capped at 10%, so it is less top-heavy than some other ETFs tracking indices that focus on European financial services companies.

The STOXX Europe 600 Optimised Banks Index has been highly erratic over the last ten years, exhibiting annualised volatility of 27.0%, versus 20.0% for the wider MSCI Europe. The financial sector is already a significant weight within the broader European market, for example it makes up roughly 20% of the STOXX Europe 600 Index. So combining this fund with a European equity product may result in overweighting this particular sector. The fund does not intend to make any distributions, so it may not suit an investor seeking regular income.

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Fundamentale Analyse


European banks, which struggled with undercapitalisation and liquidity shortages in the aftermath of the financial crisis, have continued to bolster their balance sheets and reduce risk exposure, in accordance with Basel III legislation. Many large banks have successfully recapitalised. Still, their earnings remain uncertain from quarter to quarter and they face more stringent regulation when the European Banking Union, which will complete the economic and monetary union and allow for EU-wide rules for banks in the eurozone, takes effect in November 2014, which could require further deleveraging.

In October 2014, the European Banking Authority (EBA) announced the results of its comprehensive stress test that measured 128 European banks’ capitalisation readiness and ensured they meet the required Core Tier 1 ratio. As many as 27 banks failed in the 2011 stress test but that number dropped to 13 (none of which are major banks) in the latest test, with a shortfall of EUR 9.47 billion, which is considered a relatively minor amount. The test results could potentially instil confidence in the major financial players and spur lending that is so desperately needed in Europe. The future of the European banking landscape remains uncertain, but stricter oversight and a pared down banking sector by way of capitalisation requirements are steps in the right direction.

The performance of the STOXX Europe 600 Optimised Banks Index has improved in the last two years but remains unimpressive. The regulatory shake-up and related restructuring within the banking sector following the 2008 crash has contributed to the sector’s relatively muted recovery. Between June 2007 and February 2009, the index suffered a peak-to-trough drawdown of more than 78%. Since October 2012, the price-to-earnings ratio for the index has averaged 14.8, reaching a high of 20.5 at the end of February 2014.

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The STOXX Europe 600 Optimised Banks Index is weighted by free-float market capitalisation with a liquidity adjustment. The largest exposures by country are UK (20-25%), France (10-15%) and Switzerland (8-13%). The index’s universe takes all the stocks contained within the broader STOXX Europe 600 Banks Index and excludes those from Greece and Iceland, then removes the 30 least liquid and the 30 hardest to borrow securities, provided that there are at least 10 stocks remaining after this screen, and that the combined free-float market capitalisation of the excluded stocks does not exceed 20% of the sector’s total market capitalisation. The index is reviewed quarterly, with buffers around the entrance criteria in order to reduce the turnover. The weight on any individual stock in the index is presently capped at 10%, although that maximum could change if more securities are added to the index. Stock weights are also scaled down if they are above the stock’s average daily turnover for the previous three months. The index contains 41 names and is fairly top-heavy, with the top five names accounting for 37-39% of the total. The top constituents are Banco Santander (8-10%), HSBC (7-9%) and BNP Paribas (6-8%).

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Although Source labels the replication method as “physical with swap overlay,” it is, as the rest of the market defines the term, synthetic. The ETF uses unfunded swaps to replicate the MSCI Europe Net Total Return index, meaning it uses investors’ cash to buy substitute baskets of securities from various swap counterparties including Goldman Sachs, Bank of America Merrill Lynch, JP Morgan, Morgan Stanley and Nomura (although not all five necessarily provide swaps at once). Each counterparty commits to pay the index performance in exchange for the performance of the corresponding substitute basket. The use of multiple counterparties can diversify and thus mitigate counterparty risk for synthetic products. Source’s policy is to reset to zero the fund’s exposure to any counterparty when it reaches 0.2% of the fund’s net asset value and EUR 100,000 at the end of any day, and if necessary to cap overall exposure to all counterparties at 4.5%.

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The fund’s total expense ratio (TER) is 0.30%, which is in line with other products offering similar exposure. Other costs potentially borne by the unitholder but not included in the TER include swap fees (although according to the fund’s factsheet at the time of writing, the swap cost is zero). and bid-ask spreads and brokerage fees when buy and sell orders are placed for ETF shares.

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There are a number of ETFs that track a different index with similar exposure including Amundi ETF MSCI Europe Banks and SPDR MSCI Europe Financials and Lyxor STOXX Europe 600 Banks, which excludes the least liquid components of the broader index. Of these, the Amundi ETF has the lowest TER, at 0.25%.

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Über den Autor

Caroline Gutman  ist Fondsanalystin bei Morningstar.