Analyse: iShares Barclays Capital Euro Corporate Bond ex-Financials

This ETF tracks an index which is very broad in its geographical scope, hence suiting investors looking to maximise diversification. The overwhelming majority of corporate debt issuers are located in developed economies. However, the fact remains that by gaining exposure to both large and medium-sized corporate issuers from a variety of countries, investors assume a higher level of notional risk (e.g. credit rating moves impacting on performance of specific sectors and/or countries).

Investors also have to take into consideration the potential performance risks arising from inflationary pressures and their ultimate effect on monetary policy decisions. The fund is EUR-denominated and so the monitoring focus should be on European Central Bank policy action. The ETF tracks an index with average maturity of around five years and modified duration around 4%.

Fundamentale Analyse

As a result of the severe impairment of traditional banking lending channels since the onset of the global financial crisis, investment-grade rated corporations, particularly non-financial, have had little option but to raise funds both for investment and refinancing purposes directly in the market via publicly-subscribed bonds.

Despite monetary authorities’ efforts to boost money supply--not to mention the burden of cleaning up private banks’ balance sheets which has been forced upon taxpayers--the banking sector in the world’s developed economies – particularly so in the Eurozone – continues to retain a fairly high level of risk aversion when it comes to re-opening the lending tap. Some, but certainly not all, of this behavioural pattern can be reasoned on regulatory changes (e.g. Basel III). This general backdrop may allow for above-average corporate bond issuance for the foreseeable future. Having said this, periods of highly volatile financial market conditions in the Eurozone (e.g. H2-11 or Q2-12) have routinely translated into a significant drop in EUR-denominated corporate bond issuance. In the long run, and on the assumption that bank lending eventually normalises, one would expect general mean-reversion (e.g. a decrease towards historical average issuance levels) to kick in.

Investor interest in the corporate bond market has grown substantially since the onset of the financial crisis. The search for safety away from troubled government bond markets has pushed corporate bond yields – particularly those of non-financial corporations – down by a sizeable measure (e.g. EUR-denominated investment grade non-financial corporate bond yields stood at 2.50% on average in October 2012 vs. 6.20% in January 2009). However, credit spreads (i.e. the yield difference to notional lower risk assets such as AAA-rated government bonds) do remain in positive terrain. Amongst corporate bond asset classes, financial debt usually has the highest credit spreads, followed by industrial and utility companies.

Although this ETF excludes financial corporate bonds, it is still necessary to make a mention to the efforts undertaken by the European Central Bank (ECB) to keep the inter-banking market rolling as this would be expected to have an impact on financing dynamics of all kind of corporations. Apart from conventional monetary policy measures (e.g. historically low interest rates), the ECB has routinely provided ample liquidity to the Eurozone banking sector at very favourable conditions via so-called “non-conventional measures”. Amongst these, the inclusion of three-year refinancing operations (i.e. 3y LTRO) at full allotment against an expanded list of accepted collateral has proved particularly important, although the common perception is that only a minority of this ECB funding has trickled down to real economic agents. An eventual withdrawal of the ECB special liquidity provision measures could be a factor contributing to boost financial corporate bond yields in the future. However, this would require full normalisation of conditions in the inter-banking market and the effective resumption of bank lending to economic agents. It seems fair to say that this still remains a distant prospect as we write.

Indexkonstruktion

The Barclays Capital EUR Corporate Bond ex-Financials Index measures the performance of fixed-rate investment-grade EUR-denominated corporate bonds from industrial and utility corporations issued in the Eurobond and Eurozone markets irrespective of issuing country. Bonds with equity-type features as well as floating rate notes and private placements are excluded. There is no limit on the number of bonds eligible for the index. The distribution by sector is roughly 80% in industrials and 20% in utilities. Eligible bonds must have a minimum time to maturity of one year and a minimum outstanding of EUR 300mn. The relatively low minimum outstanding allows a broad geographical diversification in terms of issuers. However, Dutch and French issuers generally account for 45-50% of the index, both in terms of the actual number of constituents and value. Bonds are priced daily by Barclays Capital traders or third-party vendors. Analytical values are calculated daily on bid prices as of 16:15 London time. The index is rebalanced monthly on the last business day of the month. Income arising from coupon and redemptions is held in the index as non-invested cash until rebalancing when it is then removed from the index.

Fondskonstruktion

iShares uses physical replication to track the performance of the Barclays Capital EUR Corporate Bond ex-Financials index. As the benchmark index of reference holds a fairly large number of components, iShares uses statistical sampling in order to construct the fund. However, close examination has routinely shown that the extent of sampling is fairly limited. As we write (e.g. early November 2012), the number of constituents in the fund stands around the 780 mark. In terms of maturity distribution, the fund has a clear short-to-medium-term maturity bias (e.g. around 80% of the fund constituents have a maturity below seven years). The fund was launched in September 2009 and is domiciled in Ireland. This is a EUR-denominated ETF that distributes dividends on a semi-annual basis, with historical data showing a January-June/July payment pattern. As of end October 2012, the tracking difference since the fund’s inception, measured in terms of annualised total returns after fees (note – the annual total expense ratio is 0.20%), stood at 0.03%. iShares may engage in securities lending in order to optimise the ETF’s tracking performance. BlackRock acts as investment manager on behalf of iShares. As from June 2012, the amount of securities that can be lent has been capped to 50% per fund. Lending operations are hedged by taking UCITS-approved collateral greater than the loan value and by revaluing loans and collateral on a daily basis. The collateral is held in a ringfenced account by a third party custodian. The degree of overcollateralisation is a function of the assets provided as collateral, but typically ranges from 102.5% to 112%. Lending revenue is split 60/40 between the ETF and BlackRock, respectively.

Gebühren

The fund’s total annual expense ratio (TER) is 0.20%. This is average for ETFs offering exposure to the EUR-denominated non-financial corporate bond market. Additional costs potentially borne by investors and not included in the TER include bid/offer spreads and brokerage fees when buy/sell orders are placed for ETF shares.

Alternativen

As we write, this iShares ETF is the clear market leader in this particular segment as measured in terms of assets under management (AUM). Alternatives from other providers lag iShares in AUM terms by a substantial measure. Amongst these we find the Lyxor Euro Corporate Bond ex Financials ETF (TER 0.20%; swap based) and the ETFlab iBoxx EUR Liquid Non-Financials Diversified ETF (TER 0.20%; physically replicated). The main difference between these two ETFs and the iShares vehicle is one of market exposure as they track an index (e.g. iBoxx Euro Liquid Corporate Non Financials) which restricts its bond universe to just 20 components in a bid to capture the most liquid segment of the non-financial segment of the EUR-denominated corporate bond market.

Lagging behind in AUM terms we find the db x-trackers iBoxx EUR Liquid Corporate 100 Non-Financial ETF (TER 0.20%) and the Amundi Euro Corporate ex-Financials iBoxx ETF (TER 0.16%), both swap-based.

It is worth noting that investors seeking to restrict exposure to this market to the shorter-end of the maturity spectrum can make use of the iShares Barclays Capital Euro Corporate ex-Financials 1-5 ETF (TER 0.20%).