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Update: iShares FTSE 250 UCITS ETF

Wer auf britische Nebenwerte setzt, geht eine deutlich zyklischere Wette ein als Investoren im Standardindex FTSE 100. Kühlt die britische Wirtschaft ab, dürften die mittelgrossen Werte in Mitleidenschaft gezogen werden.

Hortense Bioy, CFA 16.01.2015

Rolle im Portfolio

By providing broad exposure to UK mid-cap stocks, the iShares FTSE 250 UCITS ETF can serve as a tool for asset allocators looking to control their market cap and style exposures. This fund is suitable as a core holding in a UK equity allocation given its broad holdings across companies and sectors.

The FTSE 250 index is well-diversified from the perspective of individual stocks, with the top 10 holdings accounting for only 10-11% of the index’s weighting.

As a core building block, it can also be used to complement an existing allocation to UK large cap equities such as the FTSE 100 as there is no overlap between the two indices. Additionally, the two indices provide different sector exposure, with cyclical stocks representing over half of the FTSE 250 (versus less than 40% for the FTSE 100) and defensive stocks accounting for just over 10% of the FTSE 250 (versus 30% for the FTSE 100).

The fund can also act as a tactical tool to overweight UK mid-cap equities within a diversified portfolio. It could be useful for those who want to place a bet on the near-to-medium-term prospects of this asset class as a whole under the belief that they represent good value on a stand-alone basis or as compared to large-cap equities and/or small-cap equities. Investors should however keep in mind that mid-cap shares tend to be more volatile than blue chips.

Fundamentale Analyse

Midcap shares are often considered an attractive investment because of their greater growth potential and superior risk/reward profile compared to large cap shares. The theory has proven true in the UK where the FTSE 250 has returned 12.2% per annum for the past ten years, far outstripping FTSE 100’s annualised return of 7.5% over the same period. On the flip side, the FTSE 250 has also shown higher volatility as its constituents tend to be smaller, less diversified and less well-capitalised companies. This leaves mid-caps more sensitive to economic risks. The FTSE 250 has exhibited a standard deviation of 17.1% over the past ten years, compared to 13.7% for the FTSE 100 over the same period. This translates into a higher 10 year-Sharpe ratio of 0.61 for the FTSE 250 versus 0.41 for the FTSE 100.

Midcap equities have had a strong run since 2009, with the FTSE 250 TR trebling in value and hitting all-time highs. Many of the index’s cyclical industrial and consumer services stocks have seen solid earnings growth on the back of improving global demand and a faster-than-expected UK recovery.

Looking ahead, the key question is whether the conditions that have rewarded UK mid-sized companies will continue. On the economic front, UK growth is expected to cool. While the prospects for growth remain uncertain globally, the depressed situation in the Eurozone poses significant risks for the UK economy.

Adding an extra layer of risk to the UK outlook is the political uncertainty surrounding the May General Election and a potential EU in-out referendum further down the line.

That said, much of UK stock valuations will likely continue to be heavily influenced by monetary policy moves, both at home and abroad. In light of the downside risks to the UK growth outlook, slower housing market, and lower inflation pressure as a result of falling oil prices, expectations around the timing of the first interest rate rise since March 2009 have changed. A rise now looks unlikely until the second half of 2015 at the earliest. Meanwhile, the European Central Bank has been drawn into ultra-accommodative policies to address the risk of deflation and reflate domestic demand, and full-scale QE is now on the cards. On the other side of the pond, the Fed has exited its QE program, though effective tightening also looks a long way off. A continuously accommodative monetary environment will likely remain supportive of equity valuations. 

Indexkonstruktion

The FTSE 250 Index is a free float market capitalisation weighted index that offers exposure to around 250 mid-cap companies traded on the London Stock Exchange. The index is designed to measure the performance of the mid-cap capital and industry segments of the UK market not covered by the large cap FTSE 100 Index. The FTSE 250 Index represents approximately 10% of total UK market capitalisation. The constituents of the index are determined quarterly. The index’s top sector exposures include financials (32-36%), consumer discretionary (18-20%), industrials (16-20%), and materials (6-8%). The index is very well-balanced from a stock perspective, with the largest components representing between 1% and 1.5% of the index’s value.

Fondskonstruktion

The fund uses physical replication to track the performance of the FTSE 250 Gross Total Return Index. iShares uses optimised techniques to construct the fund. This means that the fund may not hold all the stocks within the index at the same weightings as stipulated by the index. The fund uses FTSE 250 futures contracts for cash equitisation purposes. This helps to minimise tracking error. The fund engages in securities lending to help improve its tracking performance. Gross lending revenue is split 62.5/37.5 between the fund and lending agent BlackRock, with BlackRock covering all the operational costs. For the year ended September 2014, the net return to the fund was 0.04%. Although this activity helps to partially offset holding costs, it potentially exposes investors to counterparty risk. To protect the fund, borrowers are requested to post collateral greater than the loan value. Data at the end of March 2014 reveals that 18% of the fund’s NAV was lent out on average in the previous 12 months, with a maximum on-loan level at any point in time of 23.1%. As a general rule, the amount of assets that iShares ETFs are allowed by BlackRock to lend out at any one point in time is capped at 50%. As an additional safeguard, BlackRock provides a guarantee for its ETFs in the event of a borrower default – if a shortfall existed between the collateral and the cost to repurchase a loaned security, BlackRock would reimburse the fund in full. 

Gebühren

The fund has a total expense ratio of 0.40%, which is at the very top end of the range for ETFs offering exposure to the UK mid-cap equity market. Additional costs borne by ETF investors but not included in the TER include transaction and rebalancing costs, while revenue from securities lending helps to offset part of these costs. The annual tracking differences (fund return - index return) observed over the last 3 years suggests that the total cost of holding the fund per year is higher 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

There is no scarcity of alternatives for ETF investors looking for exposure to UK mid-cap equities. Providers including db X-trackers, Lyxor, Source, HSBC, UBS and Vanguard offer their own FTSE 250 ETFs at total expense ratios ranging from 0.10% to 0.40%. The lowest TER is charged by Vanguard.

The iShares FTSE 250 remains the most popular and heavily-traded fund tracking the FTSE 250 on the London Stock Exchange as measured by the 3-month average daily volume.

Über den Autor Hortense Bioy, CFA

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