Rolle im Portfolio
The iShares Pfandbriefe ETF offers investors exposure to an asset class regarded amongst the safest in the European fixed income market. German Pfandbriefe (i.e. covered bonds) are covered bonds issued by German financial institutions. Although generally top rated, they offer a yield pick-up over German government bonds. The Pfandbriefe market is segmented between non-Jumbo and Jumbo, with the latter made up of issues with a minimum size of EUR 1.5bn. Historically, the Jumbo segment has represented around 20-30% of the Pfandbriefe market total outstanding.
The combination of security and yield pick-up, as well as the depth and liquidity of the Pfandbriefe market, would make this ETF a prime candidate to complement core EUR-denominated fixed income holdings in a portfolio; offering investors a relatively cheap way to rump up yield without unduly increasing risk.
The index tracked by this iShares ETF covers the German Pfandbriefe market with maturity over one year. The bulk of Pfandbriefe new issuance has average maturity of 5-7 years, while the average duration of this ETF, stands around the 3-4 year mark. This could make this ETF a tool for duration-shortening tactical strategies of EUR-denominated fixed income portfolios at times of rising interest rates.
The German-centric nature of this ETF would also make it a suitable vehicle to hedge exposure to other European covered bond markets. However, the stringent regulatory regime under which covered bond markets operate could make such use somewhat unnecesary.
Fundamentale Analyse
Pfandbriefe bonds are issued by German Pfandbriefe banks (e.g. mortgage banks) to fund loans collateralised by long-term assets, such as property mortgages, public sector loans and ship/aircraft mortgages. They have a long history and account for around 25% of the German fixed income market, making them its third largest segment after government bonds and corporate debt.
Pfandbriefe fundamentally differ from asset backed securities (ABS) in that the collateral backing the loans remains on the Pfandbriefe bank’s balance sheet, while ABS are typically off-balance. Besides, loans funded through Pfandbriefe, as well as the collateral, are kept on separate cover pools, which must be overcollateralised by at least 2% of the outstanding volume on a net present value basis. These assets serve first to satisfy Pfandbriefe creditors and are excluded from insolvency proceedings in the case of the Pfandbriefe bank’s default. A further layer of safety comes with the legal obligation for Pfandbriefe banks to conduct weekly stress tests as well as to cover liquidity needs for the next 180 days at all times.
The special legal framework underpinning the Pfandbriefe market makes it of the perceived safest asset classes alongside German government bonds. However, default tail risks considered, Pfandbriefe offer a higher yield than German government bonds across the maturity spectrum.
The Eurozone sovereign debt crisis weighed on the Pfandbriefe market, as question marks were raised about the financial health of issuing banks. Pfandbriefe issuance declined and credit spreads rose. For example, 5y Pfandbriefe credit spreads rose from a pre-crisis average of 15bps to 140bps after the collapse of Lehman Brothers. At the time, in a bid to avoid market paralysis, the ECB rolled out a programme of purchases of covered bonds worth EUR 60bn that ended in June 2010. Spreads narrowed thereafter, stabilising in a 30-50bps range. Renewed tensions in late 2011 and early 2012 again translated into substantial widening. Once again, the ECB approved purchases for up to EUR 40bn. The second programme ended in October 2012 with only 40% of purchases realised, as market tensions deflated from H2 2012 onwards.
In September 2014 the ECB announced a raft of monetary easing policy measures, including a new programme of purchases of covered bonds and ABS. This should be expected to provide key support to Eurozone covered bond valuations for a protracted period.
Indexkonstruktion
The Markit iBoxx Pfandbriefe index measures the performance of EUR-denominated fixed-rate Pfandbriefe bonds from investment-grade German issuers. All eligible bonds must have a minimum remaining maturity of one year and a minimum outstanding of EUR 500mn to be included in the index. Bonds in the index with maturity below one year are excluded at the next rebalancing. The index is rebalanced monthly on the last calendar day. Index calculations are based on bid quotes provided by multiple contributor banks. For the index to be calculated, nine distinct issuers need to be eligible for the index. If less that nine issuers are eligible, the index level is kept constant until the next rebalancing. In order to facilitate replication, the index has a maximum weight per issuer. At each rebalancing, issuers with an uncapped weight of 5% are classed as small entities, while those over 5% are treated as large cap. Individual small cap issuers are then capped at 4.5% and large cap at 24%, with the combined weight of large cap issuers not allowed to exceed 78%. Any excessive weight of large cap entities is redistributed pro-rata amongst all issuers. Cash from coupon payments is invested at the relevant money market rate until the next rebalancing, when it then is re-invested in the index. If a bond is fully redeemed intra-month, it is treated as cash until the next rebalancing.
Fondskonstruktion
The iShares Pfandbriefe ETF was launched in December 2004 and is domiciled in Germany. iShares uses physical replication to track the performance of the Markit iBoxx Pfandbriefe TR index (note – from inception until July 2013 it tracked the eb.rexx Jumbo Pfandbriefe TR index). This ETF distributes dividends. Dividend distribution for German-domicile funds can be done up to four times per year (Mar-Jun-Sep-Dec in the case of this ETF), dependant on the decision taken by the management board for the fund. iShares uses stratified sampling to construct the fund. The index is broken down into sections, each representing key risk factors (e.g. duration, currency, country, rating). The managers then choose bonds that mimic the risk profile of each section. The aggregate result is a portfolio that represents the index’s overall risk profile, while allowing the ETF manager to avoid purchasing bonds that may suffer from illiquidity. A historical analysis reveals that the number of holdings in the ETF has not deviated significantly from those in the benchmark index. As of writing (e.g. early September 2014), the number of bonds making up the fund was 114 vs. 117 constituents for the index. 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 out 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 62.5/38.5 between the ETF and BlackRock, respectively.
Gebühren
The total annual expense ratio (TER) for this ETF is 0.10%. According to our research this TER is close to the low-end of the annual cost range (e.g. 0.09-0.20%) for ETFs from the main European providers tracking covered bond market indices. It is worth noting that within this asset class, ETFs providing exposure solely to the Germany are generally cheaper than those providing pan-European covered market exposure. 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. There are also rebalancing costs whenever the index changes composition.
Alternativen
Measured in AUM terms, the iShares Pfandbriefe ETF is the most popular offering exposure to the German covered bond market.
Like-for-like alternatives in terms of geographical exposure include the db x-trackers iBoxx Germany Covered ETF (synthetic; TER 0.15%), the Deka iBoxx Liquid Germany Covered Diversified ETF (physical; TER 0.09%) and the Comstage iBoxx Germany Covered Overall ETF (TER 0.12%). All three track iBoxx indices which measure the performance of German Pfandbriefe and quasi-Pfandbriefe bonds with minimum outstanding of EUR 1bn.
db x-trackers and Comstage also offer ETFs providing exposure to delimited maturity segments of the German covered bond market. The db x-trackers iBoxx EUR Germany Covered 1-3 charges a TER of 0.15%, while the suite of Comstage iBoxx EUR Germany Covered Capped ETFs (e.g. 3-5, 5-7 and 7-10) carry a TER of 0.17%.
Investors seeking exposure to the broad Eurozone covered bond market can consider the iShares iBoxx Euro Covered Bond ETF (physical; TER 0.20%), the Lyxor EuroMTS Covered Bond Aggregate ETF (synthetic; TER 0.165%) or the actively-managed PIMCO Source Covered Bond ETF (physical; TER 0.38%).
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