Rolle im Portfolio
The iShares MDAX ETF offers exposure to the German mid-sized market segment. This fund can be employed as a tool for asset allocators looking to control their market capitalisation and style exposure. It is also suitable as a core holding in German or European equity given its broad diversification across companies and sectors.
According to some, the market for mid-cap equities is generally under-followed, under-researched and generally less efficient, hence they have potential for yielding superior returns.
Although all of the index constituents are domiciled in Germany and listed on the Frankfurt Stock Exchange, many are multinational companies which generate their revenue globally. For instance, Airbus, one of the world’s leading aircraft manufacturers generates less than 50% of its revenue in continental Europe. Others, such as the chemical distributor Brenntag and the conglomerate GEA Group generate their revenues from over 70 countries all over the world.
The mid-cap segment, in total, represents the 50 biggest German companies ranking below the 30 DAX constituents by market capitalization. They are characterized as highly efficient and innovative enterprises, achieving great efficiencies of scale through offering a narrow range of products and services that are perceived best-in-class worldwide. Investors should be aware that 90-95% of the portfolio is invested in cyclical industrials, consumer discretionary, financials and materials sectors, and therefore its performance is sensitive to the economic cycle.
This ETF is only offered as a dividend-reinvesting product and it is thus not suitable for income-seeking investors.
Fundamentale Analyse
The cyclical nature of the MDAX portfolio has expressed its full potential during the post-crisis recovery; outpacing the DAX by 6.14% on an annualized basis for the five years ending April 2015. This can be largely explained by the fact that mid-cap companies’ revenues are very susceptible to a pick-up in economic growth.
German SMEs take central stage in the German economy. According the Federal Ministry of Economics and Technology, SMEs contribute 52% of total economic output and employ 60% of the workforce, including 83% of all trainees, making them key to Germany’s low level of youth unemployment. 95% of SMEs are family-owned and favour a long-term business development approach based on strong client relationships and ongoing human capital investment. In contrast to other European countries, German mid-caps do not rely on long-term debt issuance, instead funding investment projects with equity (54%) and short-term bank loans (29%). This capital discipline makes them very resilient, while allowing investment to expand in new markets and for R&D. The latter, for example, rose by a staggering 71% between 2004 and 2010, versus 19% for large-cap companies. This technological push resulted in 54% of the German SMEs delivering new products to the market in the post-crisis years, compared to an average of European-wide average of 34%.
Notwithstanding their solid foundations, a key driver of performance for the MDAX has been the rolling out of Quantitative Easing by the ECB in early 2015. Through the purchasing government bonds, plus additional measures (e.g. zero-bound interest rates), the ECB aims to revive the Eurozone’s economy while boosting inflation. The ECB’s policy has also weakened the EUR against other major currencies, thus improving the competitiveness of the Eurozone-based export oriented companies. Considering the critical contribution the exports of goods and services make to its GDP – estimated at 45-50% – Germany is bound to be one of the main beneficiaries. Besides, the improved outlook for the Eurozone may help allay any concerns about the slowdown of emerging markets on German exporters.
After a stellar recovery from the 2008 crisis, Germany has experienced a modest above-zero GDP growth since 2012. But overall, the weakening EUR coupled with subdued energy prices and easier financial conditions across the Eurozone could set the scene for growth acceleration. This should support German mid-cap companies performance.
Indexkonstruktion
The MDAX index objective is to track the total return performance of the 50 largest German companies listed on the Frankfurt Stock Exchange, ranking below the 30 DAX companies by market capitalisation. Individual stocks are weighted on a free-float market capitalisation basis with capping of 10% to avoid single-name concentration. In terms of sector exposure, industrials dominate with a 40-45% weighting, followed by financials (20-25%) and consumer discretionary (15-20%). Amongst the companies with higher weightings are the aircraft manufacturer Airbus (8-10%) and the mass media company ProSiebenSat1 (8-10%). The index weightings are reviewed quarterly.
Fondskonstruktion
iShares uses full physical replication to replicate the performance of the MDAX index, thus purchasing all securities in the same weightings. The fund uses futures for cash flow and dividend management purposes. This is standard practice and helps limit tracking error. iShares engages in securities lending within this fund to improve its performance. The gross revenues generated from this activity are split 62.5/37.5 between the fund and the lending agent BlackRock, whereby BlackRock covers the costs involved. The fund lent out lent out 3.75% on average over the 12 months ending March 2015. To protect the fund from a borrower’s default, BlackRock takes collateral greater than the loan value. Collateral levels vary between 102.5% and 112% of the value of securities on loan, depending on the assets provided by the borrower as collateral. Additional counterparty risk mitigation measures include borrower default indemnification. Specifically, BlackRock commits to replace the securities that a borrower would fail to return. The indemnification arrangement is subject to changes, and in some cases without notice. Finally, BlackRock limits the amount of assets that can be lent out by this ETF at 50%.
Gebühren
iShares MDAX (DE) levies a total expense ratio of 0.51%, which is the upper range of ETFs tracking the German mid-cap equity segment. Other potential costs associated with holding this fund which are not include in the TER include rebalancing costs, bid-ask spreads and brokerage fees. Any revenue from securities lending helps to recoup part of the total cost. In the year to end April 2015, the fund underperformed its benchmark by 0.70%.
Alternativen
Deka and ComStage also offer ETFs tracking the MDAX Index. Both levy a comparably lower TER of 0.30%. ComStage tracks the MDAX through a synthetic structure, while Deka offers full physical replication. In the year to end April 2015, the Deka ETF showed tigher tracking than both Comstage and iShares.
An additional alternative to gain exposure to German mid-caps comes with the db x-trackers Mittelstand & MidCap ETF. The main difference with the MDAX-tracking products is that its index of reference holds 20 more stocks and is biased to companies in which founders and management have significant holdings. The ETF uses full physical replication and levies 0.40% per annum.
At this stage, all these ETF lag the iShares fund in AUM terms by a considerable measure.
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