Rolle im Portfolio
ComStage ETF DAX TR provides exposure to German large-capitalisation equities, and can be used as a core holding for investors looking to build a German-centric portfolio. Despite the fact that all index constituents are multinational companies generating revenue around the world, the DAX is often used as benchmark for the German market. For instance, the largest index constituent, BASF, generated only about 40% of its sales in Germany in 2011. Many other companies also generate less than 50% of their revenue within Germany. As such, this investment can also be seen as a passive play on the pan-European and/or global economy with a German bias. Over the past three years, the DAX has shown a 92% correlation to the widely-held EURO STOXX 50 and an 82% correlation to the MSCI World. This in part reflects the fact that some of the largest constituents of the German index, such as Siemens and BASF, are truly global players that compete worldwide in sectors like industrial materials, financial services and automobile manufacturing.
ComStage ETF DAX TR can also act as a tactical tool to overweight German equities within a diversified portfolio. However, it is important for investors to examine the index’s constituents. Like many single country indices, the DAX is fairly top heavy, with the top 10 constituents accounting for almost 70% of its value. The largest holding is BASF, which accounts for about 9.9% of the portfolio. The financial sector, consisting mainly of Allianz, Deutsche Bank and Munich Re accounts for almost 20% of the index. Investors outside of the eurozone looking at this euro-denominated fund should be aware of currency risk. A weakening euro, as witnessed in early 2010 and late 2011/early 2012 during the sovereign debt crisis, will weigh on the return of the fund in the investor’s home currency.
Fundamentale Analyse
After months of relative calmness, Europe’s sovereign debt crisis has recently regained momentum. Spain has slipped back into recession for the second time in two years and concerns are growing that Italy could be the next victim. Doubts about the future of the single currency have added a negative tone to the regional as well as the global economic outlook.
Increased uncertainty over the prospects for the Eurozone is evident in the recent volatility of the DAX Index. The one year trailing volatility for the DAX Index has more than doubled from its nearby low of 13.6% in July 2011 reaching 30.7% in June 2012, representing the largest spike amongst major European equity indices. By way of comparison, volatility for the FTSE 100 Index increased from 12.0% to 21.1% during the same period.
Germany is the largest economy in Europe and is often referred to as the economic engine of the Eurozone. The country is home to well known multinational companies representing big brands like Siemens, BMW, and Daimler. Germany’s exports currently account for about one third of GDP, making Germany the second largest exporter in the world. However, this makes the export-oriented country particularly vulnerable to the shifts in the health of the global economy, and in particular to the US and Asia, its main trading partners. Eurozone exports to the US and China grew by about 10% y/y in Q1 2012. Going forward however, Germany’s exports could suffer from a weakening global economy. China’s GDP growth forecast has been revised downwards over the last few months and Deutsche Bank (DB) currently expects the economy to grow by 7.9% in 2012, reflecting an increasingly negative outlook. In addition, the forecast US growth rate has been revised downwards to 2.3%. Despite the weak economic outlook within the Eurozone and the rest of the world, Germany’s GDP forecast was recently revised upwards to 0.8% by DB. However, the latest ZEW-Index, a leading indicator for the health of the German economy, dropped by 27.7 points to -16.9, the largest decline since October 1998.
Companies in the basic materials sector, the largest sector in the index, generally operate in a highly cyclical environment and are subject to fluctuating commodity prices. Rising raw material costs can put pressure on these firms’ margins and dampen demand. At the same time, the ongoing debt crisis will likely put further pressure on the Euro, and a weaker currency could support exports. In fact, Germany’s exports rose by 6% to €275.3bn in Q1 2012; while the Euro slipped by 2.5% versus the US dollar.
Consumer goods companies, representing the second largest sector in the index, will depend more on the strength of the domestic German economy. Low unemployment (5.4% in April) due to a 0.5% q/q growth in employment in Q1 2012, and low inflation (2.2% vs. 2.4% in the Eurozone) will serve to support consumer confidence. In fact, Germany’s volume of retail trade continues to increase with March figures showing consumer spending up by 1.6% and April up by 0.6%.
The DAX’s current P/E ratio of 13.5 is slightly above its trailing 12-month P/E ratio of 12, and represents a large discount to its trailing 10-year P/E ratio of 25.3.
Indexkonstruktion
The DAX index comprises the 30 largest companies trading on the Frankfurt Stock Exchange and represents approximately 80 % of the free-float adjusted market capitalisation of the Prime Standard Segment. The value of the DAX is based on free-float market capitalization and trading volumes. The weighting of an individual constituent is limited to 10% of the index’s value. The index weightings are reviewed quarterly and the index’s composition is reviewed once a year in September. The DAX is one of the few major country indices that is calculated on a total return basis, i.e. dividends are constantly reinvested into the index. Basic materials is the primary sector represented, with 23% of the index's value, followed by consumer goods (18%), financials (17%) and industrials (14%). BASF is the largest component of the DAX with a 9.9% weighting. Rounding out the top three constituents are Siemens and Bayer.
Fondskonstruktion
ComStage ETF DAX TR uses synthetic replication to track the performance of the DAX total return index. The fund holds a basket of securities, whose performance is given away to the swap counterparty Commerzbank in exchange for the performance of the DAX. The basket of securities consists of European equities (usually EuroStoxx 50 or DAX companies) and is reviewed daily. The swaps are reset on a regular basis or when the exposure to Commerzbank reaches the UCITS-mandated maximum limit of 10% of the fund’s NAV. The swaps are overcollateralised by a minimum of 105%. The swap collateral consists of German, UK and French government bonds. ComStage engages in securities lending within this ETF, which generates additional revenues. One hundred percent of the lending revenues (net of costs) are passed on to the fund. Although this activity can result in lower tracking error, it exposes investors to counterparty risk. To protect the fund in the instance of a borrower’s default, borrowed positions are fully collateralised with German bonds.
Gebühren
ComStage ETF DAX TR was launched in July 2010 with a very competitive TER of 0.12%, the lowest expense ratio amongst ETFs tracking the DAX.
Alternativen
The DAX is one of the most successful benchmarks tracked by ETFs in Europe, so there is no scarcity of alternatives for investors. Providers including Lyxor, db x-trackers, iShares, Source and ETFLab offer DAX ETFs, although at higher total expense ratios (ranging from 0.15% to 0.17%). Among all these funds, first mover iShares DAX (DE) remains the most popular with EUR 11.1 billion of assets under management as of this writing and a TER of 0.16%. It is also the most heavily-traded on the Frankfurt Stock Exchange as measured by the 3-month average daily trading volume, a key (but by no means comprehensive) measure of liquidity.
Alternatively, income-seeking investors could take a look at ETFLab DAX Inc, which distribute dividends to fund holders. Of course, it is important to keep tax considerations in mind as dividend income is typically taxed at a higher rate than capital gains. The funds’ expense ratio is 0.15%.
