Update: iShares FTSE 250 UCITS ETF

Dieser Mid Cap ETF ist für kontinentaleuropäische Investoren allenfalls eine Beimischung --- allerdings eine substanzielle, da britische Nebenwerte ein oft unterschätztes Segment darstellen. 

Hortense Bioy, CFA 15.04.2016

Rolle im Portfolio

The UK mid-cap equity Morningstar Category offers a limited number of options for investors to choose from, but we believe this FTSE 250 exchange-traded fund is not one of the most attractive.

For starters, at 0.40%, the iShares FTSE 250 is the most expensive passive fund in the category. Also, while it consistently tracks its benchmark, as evidenced by its low tracking error, the fund exhibits high tracking difference (fund return less index return). It has lagged its benchmark by an annualised 0.52% during the trailing three-year period.

And finally, the ETF’s underlying index, the FTSE 250 Index, doesn’t perfectly represent the opportunity set available to investors.  About 15% of its portfolio is made up of UK investment trusts--a mixed bag of strategies and geographic exposures with little or no connection to the UK stock market. Active managers in the UK mid-cap equity category tend to use the FTSE 250 ex-Investment Trust Index as starting investment universe and enjoy the flexibility to go up and down the market-cap spectrum to pick up additional returns.

The fund's exposure to investment trusts and underweighting in small caps have been a drag on past performance. This has been most evident in market environments favourable to UK mid- and small caps, as seen in recent years on the back of an improving UK economy.

The ETF has landed in the third quartile of its category during the trailing three-, five-, and 10-year periods. It has lagged the average fund every calendar year (bar one) in the past decade. The only year it landed on top of the pack was 2009, when its passive investment approach meant it was quickly able to participate in the strong equity rally following the 2008 market turmoil.

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Fundamentale Analyse

It is widely believed that the market for mid-cap equities is under-researched, underinvested, and generally less efficient than the market for large or small caps and therefore could yield superior returns.This has certainly held true during the past decade, with the FTSE 250 Index returning an annualised 8.5%, far outstripping the FTSE 100’s annualised return of 4.1%. 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 16.8% during the same period, compared with 14% for the FTSE 100. This translates into a higher 10-year Sharpe ratio of 0.3 for the FTSE 250 versus 0.1 for the FTSE 100.

Mid-caps tend to outperform large-caps over long periods of time, moreso during periods following market bottoms. Conversely, they tend to underperform during deteriorating economic conditions, periods of fear, and times of rising risk aversion. This phenomenon can be partly explained by the lower liquidity of mid-caps, which exaggerates moves in the market, but also by differences in sector exposure. The portfolio performance is heavily dependent on three cyclical sectors: financials, industrials, and consumer discretionary, which combined account for more than two thirds of the exposure.

Mid-cap equities have had a strong run since 2009, with the FTSE 250 TR Index tripling 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 midsized companies will continue. Although inflationary pressure remains low owing to the decline in oil prices, interest rates will eventually start to rise again. Expectations around monetary normalisation have created nervousness given the historically uncertain performance of equities into an increasing rate cycle, not to mention currency appreciation risks. Uncertainties about the UK economic recovery remain, with risks stemming from the unresolved debt crisis in Greece and the possibility of a further slowdown in the eurozone and some parts of Asia, especially China. Adding an extra layer of risk to the UK outlook is the uncertainty surrounding David Cameron’s referendum on EU membership, which will take place in June 2016.

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Indexkonstruktion

The FTSE 250 Index is a free-float-adjusted, market-cap-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%), industrials (17%-20%), consumer discretionary (15%-18%), and IT (7%-10%). 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.

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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 (iShares' parent company), with BlackRock covering all the operational costs. For the year ended March 2015, the net return to the fund was 0.06%. 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 December-end 2015 reveals that 27.6% of the fund’s net asset value was lent out on average in the previous 12 months, with a maximum on-loan level at any point in time of 35.7%. As a general rule, iShares ETFs are allowed to lend up to 100% of their assets. As an additional safeguard, BlackRock provides a guarantee 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 ETF in full.

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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 less index return) observed during the past three years suggests that the total cost of holding the fund per year is higher than the TER. Tracking error has been low (0.03%) during the same time period. 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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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 TERs ranging from 0.10% to 0.35%. The lowest TER is charged by Vanguard FTSE 250 ETF, which is also the best-performing ETF, as measured by tracking difference.

IShares FTSE 250 remains the most popular and heavily traded fund tracking the FTSE 250 Index on the London Stock Exchange, with the tightest bid-offer spreads.

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Über den Autor Hortense Bioy, CFA

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