Rolle im Portfolio
The iShares Swiss Domestic Government Bond 3-7 ETF offers investors exposure to the performance of the medium-dated segment one of the safest government bond markets in the world. For most investors, particularly non-Swiss based, this ETF is likely to be used as a hedge to riskier elements in an investment portfolio. The benefits of this insurance policy role could be ultimately defined as compounded, as capital gains on Swiss government bond holdings at times of risk aversion might be enhanced via currency strengthening, with the Swiss Franc (e.g. CHF) also fulfilling a safe-haven role in the world’s foreign exchange market.
Despite the medium-dated maturity bias, investors may also consider this ETF for cash (e.g. CHF) equitisation purposes. However, attention should be given to the potential for capital losses arising from exposure to domestic interest rate risk. Regarding this latter point, those with a Swiss-centric portfolio can also use this ETF for duration management purposes in response to variations in interest rates, with the medium-dated maturity of the fund allowing for both lengthening and shortening strategies depending on the overall duration of the investment portfolio.
Unless used as the fixed income building bloc of a Swiss-centric investment portfolio, the majority of likely uses for this ETF would make it more a satellite than a core element in asset allocation. As this is a CHF-denominated non-UCITS-compliant ETF, non-Swiss investors will have to account for foreign exchange and specific tax implications whenever making use of it.
Fundamentale Analyse
Switzerland is an international safe-haven of choice at times of crisis. This is predicated on a raft of factors, amongst which macroeconomic strength and sound public budget management. The federal government is constitutionally bound to keep a balanced budget over the economic cycle, and although it is allowed to run deficits at times of economic slowdown, budget shortfall projections rarely exceed 1.0% of GDP per annum.
Swiss federal government bond issuance is not a common market event, while the commitment to budgetary stability has translated into a substantial reduction in the overall public debt burden from an average of 50-55% of GDP in 1996-2005 to 35-40% thereafter. Even factoring in increases to account for the budget-deficit-generating phase of the economic cycle, the public debt burden should remain at low levels, particularly when put against the Eurozone.
The Eurozone sovereign debt crisis prompted safe-haven flows into Swiss government bonds over the past few years, with short-dated yields dipping into negative terrain at times of acute market tension, such as that experienced in mid-2012. The easing of Eurozone debt tensions from H2-12 onwards has pushed yields up from the historical lows, though not by a substantial measure. In fact, in 2013 short-dated yields have tended to remain close to zero.
Safe-haven flows pushed the Swiss Franc (CHF) to levels the Swiss National Bank (SNB) saw as threatening export competitiveness and, more worryingly, with the potential to cause a sustained deflationary phase. As a result, in August 2011 the SNB lowered its three-month Libor target to 0.0% from 0.25% and in September 2011 announced it would intervene as forcefully as required in international FX markets to enforce a minimum CHF/EUR 1.20 exchange rate. This unequivocal commitment remains in place as we write (e.g. late November 2013). In fact, the SNB considers that even at 1.20, the CHF is “still high” and would ideally want to see it weaken even further. Imported price pressures have been more than offset to propel the Swiss economy into a deflationary phase in 2012, which has continued into 2013. The SNB forecasts very low inflation rates ahead (e.g. -0.3% y/y for 2013, +0.3% y/y in 2014 and +0.7% in 2015).
The Swiss economic outlook has improved throughout 2013, with the SNB now forecasting GDP growth of 1.5-2.0% for the year, up from a previous projection of 1.0-1.5%. However, risks to outlook remain skewed to the downside, with the Eurozone’s sluggish performance still a cause for serious concern for Swiss exporters.
Barring an unlikely sea-change in circumstances, Swiss monetary policy settings are likely to be kept on ultra-loose mode for a very protracted period. As a result, yields on Swiss short-to-medium-dated government bonds should be expected to remain at very low levels for the foreseeable future. Besides, as from September 2013 the SNB requires all Swiss banks to provide more capital backing for residential mortgage loans. This measure, designed to temper the odds of a housing market bubble developing in the country, can be expected to provide solid underlying support to the domestic government bond market.
Indexkonstruktion
The Swiss Bond Index Domestic Government 3-7 is a sub-index of the Swiss Bond Index Domestic Government. The index is calculated using bid prices from SIX Swiss Exchange and is published in real time as early as 08:30 am CET. It includes all CHF-denominated fixed-rate Swiss government bonds with remaining maturity between three and seven years and minimum outstanding of CHF 100mn. Each bond is weighted by its market capitalisation. The index is calculated both on a price and total return basis, with coupon payments reinvested overnight in the latter case. Changes to the index are made on a monthly basis on the first trading day of each month.
Fondskonstruktion
The ETF was launched in November 2003 and is domiciled in Switzerland. The ETF is listed in the SIX Swiss Exchange. It is worth noting that this ETF is not compliant with UCITS legislation, meaning it cannot be passported for registration and commercial distribution to retail investors across the European Economic Area (EEA). As of this writing, the fund is authorised for commercial distribution in Switzerland and Liechtenstein. iShares uses physical replication to track the performance of the Swiss Bond Index Domestic Government 3-7 (note – total return). The reduced universe of Swiss federal government bonds allows iShares to fully replicate the underlying index, with the statistical weight of each bond in the fund’s basket reflecting their outstanding as a proportion within the 3-7y maturity bucket of the Swiss federal government bond market. As we write (e.g. late November 2013), the fund’s basket was made up of four bonds with weightings ranging from 20% to 30%. The ETF typically distributes dividends on a semi-annual basis, with most recent historical data showing a Jan-Jul payment pattern. iShares may engage in securities lending in order to optimise the ETF’s tracking performance. BlackRock acts as investment manager on behalf of iShares. The amount of securities that can be lent has been is 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 annual total expense ratio (TER) for this ETF is 0.19%. 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 of this writing, the only alternative to the iShares range of Swiss government bond ETFs is marketed by UBS-IS. Launched in November 2010, and also using physical replication, the set of UBS-IS ETFs target the same maturity segments as iShares. However, UBS-IS charge a lower TER of 0.15%. As we write, AUM for the combined range of UBS-IS Swiss government bond ETFs lags iShares by a considerable margin.
