Analyse: UBS-ETF plc MSCI Canada TRN SF

Relative to much of the developed world, Canada has exhibited considerable strength in recent years. Inflation, measured at 1.2% in September, is fairly benign, and the unemployment rate of 7.4% doesn’t look too bad. Favouring a system of national champions rather than regional middleweights, Canada’s large, conservatively-run and heavily regulated banks sailed through the global financial crisis unscathed. And thanks to a secular bull market in commodities, the resource-rich country’s stock market has shown two decades of impressive results. GDP grew at an annualised pace of 1.9% in the second quarter of 2012, roughly on par with the U.S. Through all of this, the domestic housing market has continued to march forward, barely pausing for breath at the depths of the crisis. This continued growth has sparked fears of a bubble; The Economist, for example, reckons Canada’s housing market is as expensive as the U.S.’s was prior to its collapse in 2007. Indeed, as measured against factors such as household income and rent, prices look very dear by both global and their own historical standards. In response, the federal government has taken a number of steps to cool things off, including reducing the allowable amortisation period for mortgages, and raising the down payment requirements. Still, the potential for a collapse in real estate remains a key risk for Canadian stocks, particularly the banks, which are considerably exposed to residential mortgages. Over the last 20 years the MSCI Canada Index has posted an annual gain of 9.18%, as measured in Canadian dollars, versus a corresponding local currency gain of 6.26% for the MSCI World. The Canadian dollar has strengthened immensely on the back of the same commodity story that has propelled the stock market. In the last 10 years it has risen by almost 60% against the U.S. dollar. After bottoming out at 9.1 in February 2009, the price-to-earnings ratio for the MSCI Canada Index reached 14.0 in October 2012. Since 2007 it has averaged 15.1. The Index’s top positions do not appear to offer much of a bargain. According to Morningstar equity analysts, Royal Bank of Canada stock is trading at a premium of 8.2% to what they estimate to be its fair value, and Toronto-Dominion Bank is trading at a discount of 1.2%. Third-biggest holding Bank of Nova Scotia was trading at a 6.1% discount, using the most recent closing price at the time of writing.

Indexkonstruktion

The MSCI Canada Index is a free float market capitalisation-weighted index currently consisting of 100 securities and covering approximately 85% of the Canadian equity market. New entrants must pass minimum requirements for liquidity and length of trading history. The median market cap of the constituents is $7.2 billion. The index is formally reviewed on a quarterly basis, although adjustments can be made at any time in the case of a significant corporate action. New size cut-offs are recalculated semi-annually. The ongoing reviews are meant to ensure that eligible new stocks are added to the index, and that existing stocks continue to meet criteria. To control portfolio turnover, buffers are used for existing constituents, so that they are not immediately removed upon falling out of line with any of the index’s entrance criteria. The Index is narrowly concentrated within three sectors of the economy. As of the end of September, financials made up 33.1% of the total, energy made up 26.9%, and materials 20.2%. There was a fair bit of concentration at the individual holding level, with 39.5% within the top 10 names.

Fondskonstruktion

The fund uses synthetic replication to provide exposure to the underlying benchmark, employing a combination of unfunded and funded swap structures in a ratio that can change over time. As of November 5th, 2012, 17.8% of the fund’s assets were in a funded swap, and the remaining 82.2% were in an unfunded swap. UBS provides full transparency on the swap collateral and substitute baskets. In the funded swap portion, collateral consists of 19% U.S. government bonds and 81% supranational bonds. The legal title of the collateral is transferred to the fund. In the unfunded swap portion, the substitute basket consists entirely of European and Japanese equities from a diverse set of industries. As of this writing, the fund’s level of collateralisation against the swaps is 106.22%. Under the terms of the swaps, counterparty UBS AG agrees to provide the fund with exposure to the total return of the underlying index, net of any associated taxes, costs, or fees. The return from the swap assumes that all dividends paid by the underlying stocks are reinvested in the index. The fund does not pay out any dividend distributions. The fund is Irish-domiciled and has the Canadian dollar as its base currency. At the time of writing it had assets of roughly C$58 million. The fund does not engage in securities lending.

Gebühren

For its synthetic ETFs, UBS produces what it calls the “drag level” for each fund, rather than showing the total expense ratio (TER) as it is calculated by other providers. The “drag level” is a full tally of any fees or expenses charged to the fund over a 12-month period, including management fees and swap costs. It differs from a typical TER in that the latter does not usually include swap fees. Drag levels for each fund are reviewed by UBS on an annual basis, and may be changed once a year, but once set they will remain the same for the entire 12-month period. This fund charges a drag level of 0.45%. Additional costs potentially borne by the unitholder but not included in the total expense ratio include bid-ask spreads on the ETF and brokerage fees when buy and sell orders are placed for ETF shares.

Alternativen

For exposure to large cap Canadian equities there are a number of choices. These include CS ETF(IE) on MSCI Canada, db x-trackers MSCI Canada TRN, HSBC MSCI Canada ETF, iShares MSCI Canada, and Lyxor ETF Canada (S&P/TSX 60). Of these, the biggest is the CS fund, with assets of C$230 million. The funds with the lowest TERs are the db x-trackers fund and the HSBC fund, both at 0.35%.