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Update: Amundi Govt Bond Lowest Rated EuroMTS Investment Grade ETF

Dieser ETF enthält vornehmlich europäische Staatsanleihen am unteren Ende des Investmentgrade-Ratings, primär italienische und spanische Bonds. Das Laufzeitspektrum ist relativ breit, was den Fonds weniger sensibel für Zinsentscheidungen macht.

Jose Garcia-Zarate 29.01.2016

Rolle im Portfolio

Amundi Government Bond Lowest Rated EuroMTS Investment Grade UCITS ETF offers exposure to the entire maturity spectrum of the main low-rated investment-grade eurozone government bonds.

This probably makes this ETF more suitable as a satellite component within a EUR-denominated investment portfolio. Indeed, the ETF could work as a yield-enhancing element to core holdings made up of funds encompassing either all or just the top-rated eurozone issuers. However, investors with higher tolerance for risk may use this ETF as a core building block.

This ETF can also work tactically, either as a complement or a hedging tool for investment portfolios with fixed-income exposure to other geographical areas, whether in developed or emerging markets. Foreign-exchange considerations may need to be taken into account.

Exposure to the entire maturity spectrum is suited for investors who are not particularly concerned about performance risks linked to shifts in the yield curve.

This ETF does not distribute dividends.

Fundamentale Analyse

Sovereign risk shaped pricing dynamics in the eurozone government bond market from 2009 until mid-2012, when the ECB explicitly committed to defend the integrity of the single currency area. Since then, monetary policy in the eurozone has gradually upped its accommodative policy stance, bringing its main interest rate down to zero, pushing the deposit rate into negative terrain, and, perhaps more notably, implementing a wide-ranging programme of bond purchases (that is, quantitative easing). This policy stance has allowed for a strong compression in core-peripheral bond spreads.

Despite this, the market’s perception of sovereign risk within the single currency area has suffered a structural change, and bonds from peripheral countries now must carry a sizeable country risk premium relative to Germany and other top-rated issuers.

Perceptions of sovereign risk are also influenced by the disparities in economic performance between core and periphery. As a whole, the eurozone’s performance, though up from the lows, remains below potential. However, peripheral economies continue to suffer from high unemployment and lack of credit flow to SMEs. All the while, inflationary pressures remain absent.

In December 2015, the ECB extended the quantitative easing programme until at least March 2017. All the while, the ECB remains committed to providing liquidity to the eurozone banking sector via short- and long-term operations. This signalled that the ultra-easy policy stance will remain in place for a protracted period, even when other developed economies--most notably the U.S.--have started to hike interest rates.

In principle, eurozone sovereign bonds should continue drawing support from these policy fundamentals, meaning very low yields across the maturity spectrum. Meanwhile, with regards to core-peripheral dynamics, any resurfacing of political tensions in the eurozone may prompt safe-haven flows into core issuers. However, a return to full-blown market tensions now looks highly unlikely given the backing of the ECB’s proactive stance.

Indexkonstruktion

The FTSE MTS Lowest Rated Government All-Maturity Index measures the performance of the eurozone’s conventional government bonds with minimum maturity of one year and at least two credit ratings below the highest level. Eligible issuers must have at least two investment-grade ratings from the three main rating agencies (S&P, Moody’s, and Fitch). Bonds must have a minimum outstanding of EUR 2 billion and be quoted on the MTS platform. As of this writing, the issuing countries represented in the index are Italy, Spain, Belgium, and Ireland. Each country is represented by all the bonds meeting the eligibility criteria. The index is calculated on a total return basis, with coupon payments reinvested overnight. Index calculations are carried out in real time with three price fixings through the trading session, with the last fixing at close of trading. All prices are MTS system bid prices. The index is rebalanced on a monthly basis at the beginning of the month, with planned changes announced two weeks in advance. New bonds entering an index portfolio for the first time use the best offer price quoted in MTS.

Fondskonstruktion

Amundi uses synthetic replication to track the performance of the FTSE MTS Lowest Rated Government All-Maturity Index. Amundi uses the unfunded swap model. The ETF manager uses investors’ cash to buy a basket of securities (that is, the substitute basket) and simultaneously enters into an OTC total return swap agreement with a counterparty in order to receive the performance of the benchmark (net of fees) in exchange for that of the substitute basket. The swap counterparty for Amundi’s range of fixed-income ETFs is Societe Generale. The substitute baskets for Amundi’s range of fixed-income ETFs are largely made up of investment-grade government bonds issued by OECD countries but can also include investment-grade corporate and covered bonds. Correlation between the securities included in the substitute basket and those of the underlying index is not a factor taken into consideration. The substitute basket is held in a segregated account with third-party custodian CACEIS Bank and monitored daily by Amundi’s asset managers. The composition of the substitute basket is disclosed on Amundi’s website. According to UCITS III regulations, individual counterparty risk exposure is limited to 10% of the fund’s NAV at any point in time. According to our research, Amundi has a target of zero counterparty exposure. This means that swaps are reset whenever their marked-to-market value becomes positive. Amundi does not engage in securities lending with the contents of the substitute basket.

Gebühren

The annual ongoing charge for this ETF is 0.14%. This seems to be average for ETFs providing exposure to the market of low-rated investment-grade eurozone government bonds. As this ETF uses synthetic replication, there are also swap costs to consider. Additional costs potentially borne by investors and not included in the ongoing charge include bid/offer spreads and brokerage fees when buy/sell orders are placed for ETF shares.

Alternativen

The main alternative in terms of market exposure is db x-trackers iBoxx Sovereigns Eurozone Yield Plus UCITS ETF. Also swap-based, it charges 0.15% and tracks an iBoxx benchmark that measures the performance of the five highest-yielding investment-grade eurozone government bond markets. By definition, the higher the yield, the lower the rating associated to the issuer.

Other providers also offer ETFs with exposure to low-rated eurozone government bonds. However, they do so on an individual country basis, meaning that investors seeking broad regional low-rated exposure would have to purchase a variety of building blocks. Amongst these, some of the most popular in terms of assets under management are the physically replicated iShares Italy Government Bond ETF and iShares Spain Government Bond ETF. Both charge 0.20%.

Über den Autor

Jose Garcia-Zarate  is an ETF analyst with Morningstar UK.