Analyse: UBS-ETF MSCI EMU A (EUR)

Für die antizyklische Wette: Frankreich und Finanztitel sind in diesem Euroland-Aktien-ETF hoch gewichtet.

Lee Davidson 01.06.2012
Rolle im Portfolio

The UBS ETF MSCI EMU ETF is suitable as a core equity holding to gain exposure to stocks domiciled in the European Monetary Union (EMU). The exclusion of non-EMU companies from the benchmark index increases its sector concentration compared to broader European indices such as the STOXX Europe 600. More specifically, the MSCI EMU tends to overweight financials, telecom, and utilities and underweight healthcare compared to the STOXX Europe 600. Despite these differences in sector allocation, the two indices have maintained nearly perfect positive correlation over the past 10 years (~99%). Over the same timeframe, the MSCI EMU index has also exhibited a high historical correlation (~95%) to broad international equity indices (e.g. MSCI World GR), which reflects the multinational nature of the business lines of many of the companies making up its basket of constituents.  

The high quality of most of the firms making up the MSCI EMU index makes this UBS ETF an attractive value-biased investment proposition. As of writing (April 2012), most of the index (i.e. companies representing a combined ~56% of the index’s total value) has been classified by Morningstar equity analysts as companies possessing economic moats. This classification signifies these firms as having defendable and sustainable competitive advantages.

As we write this ETF sports a dividend yield of 3.8%, roughly 2% higher than that of the MSCI World index. 

Fundamentale Analyse

The cautious optimism that characterised eurozone sentiment at the beginning of 2012 has begun to fade. Mounting concerns about deteriorating economic conditions and stagnant growth, slumps in manufacturing activity, and a decline in consumer spending have contributed to a resurgent sense of anxiety. Though GDP figures for the second quarter have yet to be released, it appears all but certain that the eurozone will register its second consecutive quarter of negative growth vaulting the region into its second technical recession in the past three years. 

To arrive at this consensus, most economists have pointed to Markit’s Purchasing Manager Index (PMI) data, which measures monthly expansion/contraction of output, where a reading above 50 indicates expansion. In April, the data revealed a reading of 47.4 for the region. In general, a reading above 50 indicates economic expansion, whereas a reading below 50 indicates contraction. Many economists rely on the PMI number in producing their economic forecasts as it has historically been positively correlated with GDP growth. The latest reading marks a five-month low, declining from March's reading of 49.1 and failing to meet market expectations at a level of 49.3. Though the French and German economies have been resilient in recent months, it appears that they are no longer immune to the spreading softness as French output contracted (46.8) at its steepest pace in six months and the rate of output growth in Germany declined to its lowest level (50.9) in 5 months.

In March, eurozone manufacturing activity fell to a three-month low and output fell for the first time this year due to slackening new orders stemming from weak local and international demand. Eurozone producers were especially hard-hit by rising costs, primarily a result of record-high oil prices, which they were largely unable to pass on to their customers. 

As conditions continue to deteriorate, firms have tried to control costs through layoffs and have become more cautious in their hiring. Consequently, the eurozone unemployment rate rose to a record high of 10.9% in April. Germany now appears to be succumbing to the broader trend of rising unemployment with reports that the country's seasonally-adjusted jobless numbers increased by 19,000 in April pushing the unemployment rate up to 6.8% from 6.7%. Economists broadly interpret this uptick to be collateral damage due to diminished demand from Germany's primary trading partners in the eurozone as they implement austerity programmes and suffer under high borrowing costs.

Meanwhile, Mario Draghi, the president of the ECB, announced that the ECB will keep its key lending rate unchanged at 1%. ECB leadership is waiting to assess the impact of its most recent LTRO package before considering further monetary easing. Draghi has stated that the success of the second LTRO package will be dependent upon the change in lending to households and small to medium-sized businesses and it will take a few months to properly measure any change. Despite strong indications that the eurozone has fallen back into recession, Mr. Draghi still anticipates the eurozone will return to growth in 2012 and that this bout of poor economic data did not alter his base-line scenario for the recovery. 

Indexkonstruktion

The MSCI EMU NR index includes approximately 85% of the free-float adjusted market capitalisation of all publicly-traded companies from European Monetary Union countries. Components must meet minimum criteria for liquidity, foreign ownership, as well as a waiting period for newly-listed stocks. Eligible securities are weighed by free-float adjusted market capitalisation. Because closely held firms will have a smaller share of their aggregate market capitalisation floated on public exchanges, the free-float adjustment serves to ensure that the underlying liquidity of the holdings is superior relative to a pure market capitalisation weighting. The index is reviewed quarterly, with May and November semi-annual reviews tending to be more comprehensive than those undertaken in February and August. As of writing, there are 274 companies included in the index. French and German equities make up approximately 64% of the index by value. The top sector weighting is financials (~20%), followed by industrials (~13%), consumer discretionary (~12%), and consumer staples (~11%).

Fondskonstruktion

The UBS-ETF MSCI EMU uses optimised physical sampling to track its reference index. The ETF invests in only in a portion of the index constituents, aiming to replicate the benchmark’s risk-return characteristics as closely as possible. In addition to shares of the reference index, the fund may invest in transferable securities, money market instruments, units of UCITs, deposits with credit institutions, and structured notes to track the reference index. At the time of this writing, however, UBS 265 of the 274 securities in the MSCI EMU and holds them in percentages comparable to the index. Given these facts, therefore, this fund may not legally be defined as a fully-replicated physical ETF, but it really should behave as one. UBS may engage in securities lending to generate additional revenues. The lending revenue generated can partially offset the TER, but UBS does not disclose what portion of revenue generated gets returned to shareholders. To protect the fund from the counterparty risk that results from this practice, UBS takes collateral greater than the loan value. Collateral levels vary from 102% to 115%, depending on the assets provided by the borrower. UBS also provides borrower default indemnification in the event that a borrower is unable to return the securities. Cash received as dividends from the underlying stocks is held in the fund’s income account until it is distributed to fund holders. Distributions are made on a semi-annual basis. This dividend treatment can potentially create a drag on returns in upward trending markets as dividends are not immediately reinvested into the fund. But in practice this cuts both ways as it could also result in outperformance if the benchmark falls in this interim period. The fund is domiciled in Luxembourg and was launched in September 2002. Its base currency is Euros.

Gebühren

UBS-ETF MSCI EMU levies a total expense ratio (TER) equal to 0.35%, which approximates the norm for ETFs providing exposure to the Eurozone equity market.

Alternativen

At the time of writing, there are a significant number of ETFs tracking the broad Eurozone equity market. In seeking this broad equity exposure, investors should primarily consider their desired level of index concentration from both a sector and geographic perspective. Investors seeking strictly large-cap European exposure are likely to consider ETFs that track the DJ Euro STOXX 50 index as this is the most widely-tracked index in Europe. There are plenty of alternatives available from multiple providers, including iShares, Credit Suisse, HSBC, ComStage, Source, Lyxor, UBS, ETFLab and BBVA. The largest and most heavily-traded ETF tracking this index is the Lyxor ETF EURO STOXX 50 A. The fund charges a TER of 0.25%. The cheapest option (speaking strictly in terms of TER) is offered by db X-trackers with a TER of 0.00%.

Investors preferring a pan-European exposure, including companies outside the Eurozone, can look for ETFs tracking broader European large cap indices such as the MSCI Europe and the STOXX Europe 600. Again here, there is no shortage of options, with all the major providers offering funds that track the MSCI Europe at TERs ranging from 0.25% to 0.35%. Investors preferring the STOXX Europe 600 index could consider the iShares STOXX Europe 600 with a TER of 0.21%. This fund has by far the most on-exchange volume of any of the ETFs tracking the STOXX Europe 600.

Über den Autor

Lee Davidson  is an ETF analyst with Morningstar Europe.