Update: Lyxor UCITS ETF FTSE 100

Versorger, Rohstoffe und Energie haben FTSE-Investoren in den vergangenen Jahren zu schaffen gemacht. Allerdings haben gerade solche Titel in den ersten Monaten dieses Jahres einen Comeback gesehen. Die meisten britischen Large Caps sind global ausgerichtete Konzerne und oft Weltmarktführer.  

Hortense Bioy, CFA 15.04.2016

Rolle im Portfolio

The fund provides exposure to the UK’s 100 largest stocks. As such, it can be used as a core holding for investors looking to build a UK-centric portfolio and wishing to complement an allocation to mid-caps and small caps. It is also suitable as a tactical tool.

While the FTSE 100 is a widely followed benchmark, often cited as a bellwether for the UK economy and used as a barometer of investor sentiment about the UK stock market, it consists predominantly of global players, with more than 70% of their revenue coming from abroad. It also has historically been a relatively concentrated index, with, in recent years, a large overweighting in energy and mining companies.

Because of its mega-cap focus and constrained nature, the FTSE 100 stands as a narrow investment proposition that doesn’t represent the opportunity set available to managers of active UK equity funds. Active managers in the UK large-cap blend equity Morningstar Category have the ability to veer away from their UK large-cap mandates and tap into the mid- and small-cap segment when the market environment is favourable to the latter, as has been the case for the past few years.

With that in mind, it is no surprise then that this fund has lagged surviving category peers since its 2012 inception, while rival FTSE 100 exchange-traded funds with longer track records have also underperformed over the trailing three-, five-, and 10-year periods, on an annualised risk-adjusted return basis.

All that said, if one is looking for passive exposure to the pure large-cap segment of the UK market, the synthetically replicated Lyxor FTSE 100 ETF C is a strong choice. At 0.15%, the fund might not be the cheapest when compared with other FTSE 100 ETFs but it is one of the best performing, as measured by tracking difference (fund return less index return). Tracking error has also been very low.

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Fundamentale Analyse

The FTSE 100 has been a notable laggard over the past five years, underperforming the S&P 500, its US large-cap equivalent, as well as the UK mid- and small-cap FTSE 250 by 6% and 6.2% in annualised terms, respectively.

Most of this underperformance is attributable to the FTSE 100’s heavy concentration in the resources sector (that is, energy and mining companies), which post-financial-crisis grew to become the index’s top sector, with a weighting of over 30%, supported by the voracious appetite of emerging markets. Companies like Royal Dutch Shell and Rio Tinto have since been hit hard by a slowdown in China, compounded by the collapse in the price of oil and other commodities. As a result of their deflating valuations, energy and basic material stocks account today for less than 13% and 6% of the index value, respectively.

Meanwhile, consumer defensive stocks, including British American Tobacco, Reckitt Benckiser, and Unilever, have seen their share price surge and their index weight increase. Today the consumer defensive sector represents about 20% of the FTSE 100, up from 15% five years ago. It has become the index’s second-largest sector, behind financials (21%). The higher valuations can be justified by the good operational performance of the underlying companies, but perhaps not entirely. The search for yield and safety in the prolonged low interest rate and volatile market environment has led to increased demand for high-yielding and stable stocks, with consumer staples perceived as a safe bet.

Another sector that has seen its representation in the FTSE 100 increase over the past few years is consumer cyclicals. Helped by low interest rates and the UK’s relatively strong domestic recovery, the sector now makes up 10% of the index, double what it was five years ago, and at par with healthcare.

It can be argued that, as currently constituted, the FTSE 100 appears a better balanced and more diversified benchmark than it was five years ago. It certainly is if compared with the pre-crisis era when banks pushed the index’s exposure to financials to over 40% of its market capitalisation, or even if compared with the late 1990s, when the index was overexposed to telecom and technology companies. That said, the current composition is bound to be temporary.

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The FTSE 100 is a free float market-capitalisation-weighted index that offers exposure to the 100 largest UK stocks. It represents about 80%-85% of the market capitalisation of the London Stock Exchange and 7%-8% of the world’s equity market capitalisation. The constituents of the index are determined quarterly. The index’s top sector exposures include financials (19%-23%), consumer staples (17%-21%), energy (12%-15%), consumer discretionary (9%-12%), and healthcare (8%-11%). The index looks fairly well balanced from a stock perspective. HSBC and Royal Dutch Shell are the two largest components of the FTSE 100 with a 5%-8% weighting each. The next largest stocks represented are British American Tobacco, GlaxoSmithKline, and BP, with a 4%-7% weighting each.

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The fund uses synthetic replication to track the performance of the FTSE 100 Total Return index. To achieve this performance, the fund buys and holds a basket of securities and simultaneously enters an un-funded swap agreement with parent company Societe Generale. Under this agreement, the ETF receives the performance of the index (net of a positive or negative swap spread) in exchange for the performance of the fund's holdings. Lyxor commits to targeting zero counterparty risk exposure. The swap is therefore reset whenever the swap value becomes positive. Swaps may sometimes have a negative value, which would be in essence equivalent to an over-collateralisation of the fund. The substitute basket, which can change daily, is made up of liquid stocks that belong to major world indexes and maintain a minimum average trading volume and market capitalisation. As of this writing, the holdings represent 100.27% of fund's net asset value, which means the ETF has a negative swap exposure of negative 0.27% to Societe Generale. The holdings, which are monitored daily by Lyxor’s asset manager, are held in a segregated account at Lyxor’s custodian, Societe Generale Security Services. No securities lending is implemented within this fund.

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At 0.15%, the fund’s ongoing charge is in the middle of the range for ETFs tracking the FTSE 100 index. Index funds should provide the returns of their benchmark, less fees. However, during the past three years, the Lyxor FTSE 100 ETF C has delivered more than that, with a tracking difference (fund return less index return) of less than 0.10% on an annualised basis. Tracking error has been kept below 0.03% over the same period. Tracking error is a measure of how closely a index fund follows its index. The closer the tracking error is to zero, the better or more efficient the fund is. On top of holding costs, ETF investors will typically be charged trading costs, including bid-offer spreads and brokerage commissions when buy and sell orders are placed for ETF shares.

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There is no scarcity of alternatives for investors looking for exposure to UK large-cap equities. Providers including db X-trackers, iShares, Vanguard, Source, HSBC, ComStage, Amundi, and UBS all offer a FTSE 100 or MSCI UK ETF at total expense ratios ranging from 0.07% to 0.33%.

Investors preferring physical replication could consider the Vanguard FTSE 100 ETF, which charges a fee of 0.07%. Investors seeking income could consider the iShares Core FTSE 100 (Dist), which also charges the lowest fee of 0.07%. 

Those looking for broader and more diversified exposure to the UK equity market can consider ETFs that track the FTSE All-Share index, which represents at least 98% of the UK market capitalisation and is the aggregation of FTSE 100, FTSE 250, and FTSE Small Cap indexes. The SPDR FTSE UK All-Share ETF charges the lowest total expense ratio at 0.20%. It also carries the lowest total holding cost, as measured by the historical tracking difference.

There is also a range of strategic beta offerings that allow investors to slant their portfolios towards dividends, value, low volatility, and other factors. These include the SPDR S&P UK Dividends Aristocrats ETF (0.30%) and the Ossiam FTSE 100 Minimum Variance ETF (0.45%).

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Über den Autor

Hortense Bioy, CFA

Hortense Bioy, CFA  is director of passive fund research in Europe.