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Update: db x-trackers Euro Stoxx 50® Short Daily UCITS ETF

Mit diesem Hebel-ETF spekulieren Anleger auf fallende Kurse beim EURO STOXX 50. Er eignet sich eher für eine direktionale Wette und weniger für eine Absicherung eines Euroland-Aktienportfolios.

Hortense Bioy, CFA 12.12.2014

Rolle im Portfolio

The db x-trackers EURO STOXX 50 Short Daily 1C should be viewed as a specialty satellite holding best suited for active traders who understand how inverse funds work. This fund can provide a very short-term hedge for investors looking to protect a portfolio consisting mostly of eurozone equities if the market falls. It can also be used as a short term trading tool and provide the opportunity to speculate on a decline of the eurozone equity market. This fund is not suitable as a buy and hold investment.

Prospective investors should understand the risks involved in inverse ETFs, especially the effects of path dependency and compounding on returns. Because of the daily compounding arithmetic, investors are not guaranteed to get the index's inverse return for any holding period longer than one day plus interest (based on EONIA) earned on the investment. As an example (ignoring earned interest), imagine that the EURO STOXX 50 falls from 100 points to 90 points in one day, a decline of 10%, and then climbs back to 100 the next day--an increase of 11.11%. On the first day, the fund should rise by 10% to 110 but then fall by 11.11% the next day to 97.78. 

It should be noted that using this fund has a couple of advantages in comparison to shorting the EURO STOXX 50 index. This is an effective strategy for investors trapped in a long position during a prolonged bear market. By using this fund, they could avoid the taxes, spreads and broker fees that they would otherwise face if they sold their entire portfolio. Another advantage of buying this fundover shorting the index is that investors can’t lose more money than they have invested in it, unlike a traditional short position, which exposes investors to the potential for unlimited losses.

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Fundamentale Analyse

Leveraged and inverse ETFs have attracted a lot of bad press over the past few years because of large losses experienced by investors who didn’t understand the effect of daily compounding and volatility on these funds’ long-term returns. Despite this, these funds have remained very popular as evidenced by the steady amount of assets under management and large daily trading volume. 

The Eurozone is arguably one of the biggest disappointing economic stories of 2014. The “slow but steady” economic recovery that many had anticipated has ground to a halt, while the probability that the currency bloc slips into its third recession since the 2008 financial crisis has increased. Meanwhile, disinflation and high unemployment remain key concerns.

Although the Eurozone economy faces its share of challenges, it should be noted that the components of EURO STOXX 50 index are predominantly large, stable, high-quality companies which do a large amount of business internationally. Some of the largest index components are companies with a large presence in emerging markets -- Latin America in the case of Banco Santander, and Asia in the case of Unilever. These multinationals will continue to benefit from the growth in emerging markets, even if it is expected to be more moderate going forward.

In any case, as of now, Eurozone equity market valuations continue to be primarily driven by monetary policy expectations. The Euro Stoxx 50 index has risen almost 60% since Draghi’s unequivocal pledge in the summer 2012 to “do whatever it takes” to preserve the euro, hovering around 2007 pre-crisis highs by end 2014.

The European Central Bank (ECB) has slashed interest rates, offered cheap long-term loans to banks and bought asset-backed securities and covered bonds in a bid to encourage banks to lend and boost domestic demand. President Mario Draghi has even pledged to implement more unconventional measures if needed, which investors have interpreted as full-scale QE (purchases of sovereign bonds).

The ECB also hopes its stimulus measures will further depreciate the euro --The euro has already fallen by about 10% in 2014 against the dollar. A weaker euro would help to boost competitiveness and combat deflation. The fall in commodity prices is making the ECB task much more difficult and therefore increases the chances of QE.

However, there is only so much the ECB can do and Draghi has called on European political leaders to implement structural reforms such as improving labour market and fiscal policies. Countries that have undertaken reforms like Spain and Ireland are reaping the benefits. It’s now up to countries like Italy and France to do their part.

Against this background, Eurozone equity valuations will likely continue to be determined by monetary policy moves. The obvious risk is that if full-scale QE doesn’t materialise and the macro outlook doesn’t improve, equity markets might take a turn for the worse.

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The EURO STOXX 50 Short Daily index is an index which aims to provide the inverse return of the EURO STOXX 50 Net Return index plus interest (based on EONIA) earned on the investment. The EURO STOXX 50 index includes 50 companies. To be eligible for inclusion a company must be headquartered in a country of the EMU. The index is weighted by free-float adjusted market capitalisation, with each component capped at a maximum of 10% of the index’s overall value. Full reviews are done in September of each year, but there are criteria which can turn over components sooner, such as a merger, bankruptcy or a constituent otherwise slipping from the ranks of the top 75. The financial sector is the biggest sector represented, comprising 24-28% of the index's value, followed by consumer goods (16-20%), and industrials (12-14%). French and German companies account for about 65-70% of the index. Spanish and Italian companies represent another 20-23% and the remainder is spread amongst another eight countries. The index is fairly well-balanced from a single stock perspective. Total is the largest component of the EURO STOXX 50 with a 4-6% weighting. The second and third largest stocks represented are Sanofi and Bayer.

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The fund uses synthetic replication to track the performance of the EURO STOXX 50 Short Daily index. To achieve this return, the fund invests in a fully-funded swap with parent company Deutsche Bank. Under this swap agreement, investors' cash is transferred to the swap counterparty in exchange for the performance of the index. To mitigate counterparty risk, Deutsche Bank post collateral greater than the net asset value (NAV) of the fund, which results in overcollateralisation of the fund. Collateral is held in a segregated account with custodian State Street Bank Luxembourg in Deutsche Bank’s name and pledged in favour of the fund. Collateral is reviewed daily by third party State Street Global Advisors (SSgA). Eligible collateral assets are OECD equities and/or bonds with a minimum of investment grade (government and corporate). Haircuts ranging from 7.5% to 20% are applied for equity collateral, 10% for corporate bond collateral and 0% for government bond collateral. As of this writing, the collateral value is equivalent to 120% of the fund's NAV. Should Deutsche Bank default, the ETF may be terminated, the pledge enforced without giving prior notice to Deutsche Bank, and the collateral liquidated.

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The ETF charges a total expense ratio (TER) of 0.40%. It's at the high end of the range for inverse EURO STOXX 50 ETFs. In addition, the investors will be charged a 0.30% swap fees, which brings the estimated holding costs to 0.70% per annum. On top of holding costs, ETF investors will typically be charged trading costs, including bid-offer spreads and brokerage commissions when buy and sell orders are placed for ETF shares.

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ComStage and Amundi offer cheaper alternatives (strictly in terms of TER) with TERs of 0.35% and 0.30%, respectively, but these fees may come at the expense of lower liquidity. As these inverse ETFs are only appropriate for short holding periods, investors should probably focus more on considerations such as trading costs and tracking error than annual fee differences of 5 or 10 basis points. Higher liquidity may allow ETF trades to be executed at tighter bid-ask spreads.

For a TER of 0.50%, db x-trackers also offers a double-short EURO STOXX 50 ETF, giving exposure to twice the inverse return of the EURO STOXX 50. Alternatively, the Boost EURO STOXX 50 3x Short Daily ETP provides 3 times the daily performance of the index for a TER of 0.80%. However, investors should be aware that the use of leverage will increase their risk exposure and can lead to greater losses.

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Über den Autor Hortense Bioy, CFA

Hortense Bioy, CFA  is director of passive fund research in Europe.