Analyse: Source Stoxx Europe 600 Opt Basic Resources ETF

Optimierter Zugang zur zyklischen Minenaktien-Branche.

Lee Davidson 24.01.2012

Rolle im Portfolio

The Source STOXX Europe 600 Opt Basic Resources ETF provides exposure to top-tier global miners in a considerably cyclical sector. Given its narrow sector focus, this fund is most suitable for use as a tactical tool to complement a diversified portfolio. 

Metal and mining companies tend to experience pronounced cyclicality given the unpredictable nature of commodity prices and producers' high fixed costs. The precariousness of this equity sector-ETF is aggravated due to environmental and operational risks associated with mining as well as country-specific risks associated with some of these firms' assets. Consequently, this ETF’s basic resources reference index has experienced significantly higher volatility than broader market indices, like the STOXX Europe 600. In the past three years, the STOXX Europe 600 Basic Resources index has exhibited standard deviation of returns equal to 34% compared to approximately 25% for the STOXX Europe 600. That said, however, the majority of this index is comprised of the shares of large-cap miners with very global and diverse operations and not pure plays on specific commodity. As such the index’s constituents have to some extent been able to better weather commodity price volatility as compared to their more concentrated peers.

Fundamentale Analyse

In the aftermath of the financial crisis, large diversified basic resources firms have enjoyed an enviable tailwind in the form of a meteoric rise in commodity prices and seemingly insatiable Chinese metal demand. Over the past three years, the sector has posted 19.8% annualised returns. Today, developing nations in the midst of continuing urbanisation are putting upward pressure on prices for staple commodities like iron ore, coal, and copper. Furthermore, a lack of new world-class deposit discoveries and diminishing ore grades mean that top-tier miners will likely be hard pressed to keep pace with rising demand, especially from emerging market economies, and should continue to reap the benefits of rising commodity prices going forward.

Looking ahead, as emerging markets continue to urbanise, the level of metal intensity per capita for these economies is poised to rise in the long run. As such, much of these firms' success depends upon continued Chinese and emerging market demand. Recently, Chinese growth expectations specifically have been depressed, but China remains a prime opportunity for metal producers. As it stands now, China is the world's largest consumer of copper, aluminum, nickel, coal, steel and iron ore. Chinese metal intensity per capita has been sharply increasing over the last 5 years, and there is still room for growth. For every 1,000 people, China has only 38 automobiles compared to 830 in the US. By 2025, population forecasts indicate that China will have built 10 cities larger than New York and should have roughly 200 cities with more than one million people compared to only 35 for Europe.

Without question, the biggest risk for these firms is that emerging markets growth trajectory will slow. If metal demand abates, expect these firms to suffer. For those interested in keeping a vigilant watch on commodity demand, China's monthly PMI is as good a measure as any as it seeks to measure the growth of China's manufacturing output (a reading above 50 indicates expansion). If emerging market manufacturing slows, commodity prices will likely fall. In the case of a severe and lengthy downturn in commodity prices, some of these firms may struggle to turn a profit. As always, these firms are subject to environmental, operating, taxation, and political risks that can quickly change their outlook and potentially alter the basic resources landscape. We saw this in the first quarter of 2011--as bad weather across the world (e.g. rains in Chile and Eastern Australia) cramped production and closed some large mines for a time.

This basic resources sector ETF is a high-risk, high-reward proposition. Morningstar equity analysts tend to agree that diversified miners usually trade at discounts to their fair value as compared to pure-play suppliers. Not surprisingly, therefore, the two largest miners in the index (Rio Tinto and BHP Billiton) currently trade at deep discounts to their intrinsic value according to our equity analysts. The bulk of the firms in this index have demonstrated stable cash flows, are conservatively leveraged, and are diversified both geographically and across the commodity space.

Indexkonstruktion

Source STOXX Europe 600 Opt Basic Resources ETF tracks an “optimised” version of the STOXX Europe 600 Basic Resources index that applies a liquidity cap to reduce the weighting of the components whose average daily turnover, as a fraction of their free-float market capitalisation, is below the sector average. Additionally, the index provider eliminates companies from Greece and Ireland from the index to further promote a higher degree of liquidity. Underneath the basic resources super-sector umbrella are the forestry and paper, industrial metals and mining, and general mining sectors. Similar to non-optimised version of the index, the “optimised” version of the index is relatively top-heavy with the top 5 index constituents comprising nearly 70% of its value. The top five holdings are all top-tier global metals and mining companies with broad geographic reach and wide breadth of commodity coverage. These holdings include Rio Tinto (~16%), BHP Billiton (~16%), Anglo American (~15%), Xstrata (~13%), and ArcelorMittal (~8%). The index weightings are not capped, but are adjusted on a quarterly basis in March, June, September, and December as a result of the review of the STOXX Europe 600.

Fondskonstruktion

The Source STOXX Europe 600 Optimised Basic Resources ETFs uses synthetic replication to track the performance of the STOXX Europe 600 Optimised Basic Resources index. Source utilises the unfunded swap model, engaging multiple swap counterparties, which diversifies counterparty exposure. The eligible swap counterparties include Bank of America Merrill Lynch (A2, A, A+), Goldman Sachs (A1, A, A+), Morgan Stanley (A2, A, A), JP Morgan (Aa1, AA-, AA-), Nomura (Baa2, BBB+, BBB), and Credit Suisse (Aa1, A+, AA). Source will reset swaps to zero monthly. Additionally, swaps will be reset every time a swap counterparty executes a creation/redemption or when counterparty exposure reaches 4.5% of the fund’s NAV. Counterparties are required to deliver a basket of European, US, and Japanese equities to be held at Northern Trust in segregated accounts. The swap provider receives the performance of the collateral basket plus a fee in exchange for the index performance. Source strives to achieve high levels of correlation between the substitute basket and the fund’s benchmark index. This ETF does not distribute dividends to investors. At this time, Source does not engage in securities lending, but securities lending is not prohibited. Source has stated that it will notify investors prior to engaging in this practice.

Gebühren

Source charges a total expense ration (TER) of 0.30% for this ETF, which is at the low end of the range for those ETFs tracking various versions of the STOXX Europe 600 Basic Resources Index.

Alternativen

In selecting a product to gain basic resource exposure, the replication methods and total expense ratios are the primary data points to consider because these will determine how closely the products track their reference indices. Currently, Source utilises the “optimised” version of the STOXX Europe Basic Resource index, whereas most other ETF providers use the free-float market capitalisation weighted version.

Über den Autor

Lee Davidson  is an ETF analyst with Morningstar Europe.