Update: Amundi ETF CAC 40 UCITS ETF

Wer auf den französischen Standardwerte-Index setzt, baut darauf, dass die vielen globalen Player zu Unrecht in den Sog der Konjunkturschwäche des Nachbarlandes im Westen geraten sind.

Hortense Bioy, CFA 09.01.2015

Rolle im Portfolio

The Amundi ETF CAC 40 UCITS ETF provides diversified exposure to French large-cap equities and can be used as a core holding within a diversified portfolio. It would appeal mostly to investors looking to build a French-centric portfolio. These should however be mindful of correlations and potential overlaps with the rest of their equity allocation. The performance of the CAC 40 index is closely correlated to broad international indices, and especially European indices. For instance, the CAC 40 has shown a 5-year correlation of 98% to the widely-tracked EURO STOXX 50, which has a 35-40% weighting in French equities.

This fund can also act as a tactical tool to overweight French large-cap equities within a diversified portfolio under the belief this market is undervalued given its near-to-medium-term prospects. Investors considering this fund to make a play on the French economy should be aware that some of the largest constituents of the CAC 40 index, such as Total and Sanofi, are truly global players with 70 to 90% of their revenues coming from outside of France. Therefore, this fund is far from offering pure exposure to the French economy.

Like many single country indices, the CAC 40 is fairly top heavy, with the top 10 constituents accounting for about 55% of its total value.

Investors outside the eurozone should be mindful of the currency risk inherent in this euro-denominated fund. A weakening euro relative to the investor's home currency will negatively affect their return.

Fundamentale Analyse

French stocks haven’t still fully recovered from the financial crisis. Unlike other leading European benchmarks like the DAX or the FTSE 100, the CAC 40 index is still priced below its pre-crisis highs of 2007, as of this writing. To some extent, one can argue this relative underperformance reflects the country’s lacklustre economic performance.

French GDP has been almost stagnant for the past five years, the unemployment rate has increased – exceeding the 10% mark – and public finances have deteriorated as a result of past stimulus programs undertaken to tackle the economic crisis. The response to all this from President Francois Hollande has so far been unconvincing. Rather than implementing big structural reforms, he has barely started liberalising the labour market, while instead of cutting public spending, he has raised taxes. However, the government reshuffle in 2014, which saw a number of traditional left-wingers being replaced by more reformist ministers, has raised hopes for some needed catching-up on the reform front.

That said, it is important to remember that the performance of the French equity market is not solely a factor of the country’s economic health. The high-quality French companies which make up the CAC 40 are not only dominant in France, but also market leaders abroad, as exemplified by Total, the world’s fifth largest oil producer, and BNP Paribas, Europe’s biggest bank in terms of assets. In fact, an estimated 70% of CAC 40 companies’ profits are generated outside of France and 40% outside of the Eurozone. These companies are well-placed to take advantage of continued growth in emerging markets, even though growth in countries like China, India and Brazil is to be more moderate going forward.

In any case, as of now, valuations in the French equity market, like in most other developed markets, continue to be primarily driven by monetary policy expectations. The CAC 40 GR index has risen 50% since Draghi’s unequivocal pledge in the summer 2012 to “do whatever it takes” to preserve the euro.

The European Central Bank (ECB) has slashed interest rates, offered cheap long-term loans to banks and bought assets 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 of French exporters. It would also help to tackle the risk of deflation.

Looking ahead, French GDP is expected to pick up slowly but steadily, supported by an improving external environment. The main drag on growth will remain the need to trim government spending. This will constrain domestic demand, France’s traditional growth driver, but could at the same time have a positive impact on the investment climate in France.

Indexkonstruktion

The CAC 40 is the benchmark index of the French stock market. It is a capitalisation-weighted measure of the top 40 equities among the 100 largest publicly listed companies on the Paris stock exchange. The index’s composition is reviewed quarterly. At each review date, the companies listed on Euronext Paris are ranked according to free float market capitalisation and share turnover over the prior 12 months. Each component’s weighting in the index is capped at 15%. Industrials, financials, and consumer goods are the top three sectors, with a 15-18% weighting each, followed by oil & gas (12-15%). Sanofi and Total are the largest stock constituents with a 10-13% weighting each. The third largest stock represented is BNP Paribas (5-7%).

Fondskonstruktion

The fund uses physical replication to track the performance of the CAC 40 net total return index. The fund buys all the securities within the index in the same weightings as in the index. The dividends paid out by the underlying stocks are reinvested via the use of futures until they are distributed once a year to fund holders. The fund engages in securities lending to help improve its tracking performance. Amundi may lend out up to 23% of the fund’s assets to help generate extra revenue. Gross lending revenue is split 60/40 between the fund and Amundi, with the latter covering the operational costs. Although this activity can help to partially offset the TER, it potentially exposes investors to counterparty risk. To protect the fund, Amundi takes collateral greater than the loan value. Over the past 12 months (to end June 2014), the fund received a net return of 0.02% from securities lending. The average on-loan level was 19.6%.

Gebühren

At 0.25%, this fund’s total expense ratio (TER) is at the top-end of the range for ETFs tracking the CAC 40. However, the tracking difference (fund return - index return) over the past few years suggests that the total holding cost is slightly lower than the TER. 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.

Alternativen

As an alternative, income-seeking investors can turn to Amundi ETF CAC 40 (D), which distributes dividends.

Other providers offering ETFs that track the French benchmark include Lyxor, EasyETF, db X-trackers and ComStage, at TER ranging from 0.20% to 0.25%. The Lyxor CAC 40 ETF (TER 0.25%) is the largest fund, as measured by assets under management and the most heavily-traded on Euronext Paris as measured by the 3-month average daily volume. This high level of exchange liquidity is a positive feature that allows investors to benefit from tight bid-ask spreads, thereby reducing transaction costs.

Über den Autor Hortense Bioy, CFA

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