Update: iShares Euro Covered Bond UCITS ETF

Covered Bonds, zu deutsch: Pfandbriefe, gelten als sichere Alternative zu Staatsanleihen und bieten in Zeiten tiefster Zinsen einen Schnaps mehr Rendite. Dieser Indexfonds setzt auf Euro-Emissionen mit mittleren Laufzeiten und einem Volumen von mindestens einer Milliarde Euro. 

Jose Garcia-Zarate 26.08.2016

Rolle im Portfolio

The iShares Euro Covered Bond ETF offers investors exposure to an asset class generally regarded as amongst the safest within the fixed-income universe, namely that of covered bonds. The combination of yield pickup over government bonds and a low risk profile underpinned on a robust legal framework make covered bonds an ideal yield-enhancing vehicle. This exchange-traded fund can work as a core fixed-income holding of a euro-centric investment portfolio.

The bulk of covered-bond issuance is done in medium-dated maturities. This exchange-traded fund has a modified duration around the four-year mark.

This ETF tracks an index encompassing euro-denominated issuing institutions irrespective of country. France, Spain, and Germany are the main contributors. Pricing dynamics for these national covered-bond markets may differ, although in general terms German covered bonds will be the lowest-yielding. This may call for a greater level of monitoring of trends than required for an ETF tracking a single country covered-bond market (for example, the German Pfandbriefe market).

Fundamentale Analyse

Covered bonds are issued by financial institutions and are backed by a pool of assets that is generally made up of high-quality mortgages or loans to public sector institutions. The issuer of a covered bond is legally bound to maintain sufficient assets in the cover pool in order to satisfy any potential claims at any given time by bondholders. In the case of default, bondholders have a direct claim against the issuer and a preferential claim over the cover pool of assets. These layers of security--specifically the role of the cover pool as a guarantee--make covered bonds very different from asset-backed securities, which by contrast offer direct exposure to the assets in the cover pool. This robust legal framework makes covered bonds a low-risk alternative to government bonds.

Covered bonds tend to offer a yield pickup over sovereign bonds during normal financial conditions, while the reverse may apply at times of tension in the sovereign bond market. However, there are occasions when negative trends for sovereigns may feed through to the covered-bond market--for example, whenever there is a direct link to the financial health of the banking sector. This is what happened at the height of the eurozone sovereign debt crisis.

Credit spreads for covered bonds issued by German and, to a lesser extent, French institutions tend to be tighter than those for bonds issued by Spanish or Irish entities. The intertwined sovereign-banking crisis had an impact on the latter. In addition, these two economies also experienced a housing-market crash, which directly weighed on valuations on covered pools made up of mortgages.

Ultimately, covered bonds tend to move in tandem with sovereign bonds. As such, the European Central Bank’s ultra-accommodative policy stance--expected to remain in place for a protracted period--provides support to eurozone covered-bond valuations. By the same token, any downside to government-bond prices would also weigh on covered-bond valuations.

Indexkonstruktion

The Markit iBoxx EUR Covered Bond Index measures the performance of the euro-denominated covered-bond market irrespective of issuing country. The index comprises bonds backed by a pool of assets as well as bonds with a structure affording an equivalent risk and credit profile to covered bonds. The index covers all maturity buckets above one year. Eligible bonds must have a minimum outstanding of EUR 1 billion. However, covered bonds with an outstanding between EUR 0.5 billion-EUR 1 billion can be included in the index as long as they have three lead managers, excluding the issuer itself. Bonds are weighted according to their outstanding. Issuing entities are required to have an investment-grade rating, calculated by Markit as the average rating from the three main rating agencies. The index is calculated on a total return basis using daily closing prices. Prices for all bonds are provided by 10 major financial institutions and are then consolidated for index-calculation purposes. The index is rebalanced on a monthly basis. Intramonth coupon payments are held as cash until rebalancing and then reinvested.

Fondskonstruktion

IShares uses physical replication to track the performance of the iBoxx EUR Covered Bond Index. As the reference benchmark holds a large number of constituents, iShares uses stratified sampling to construct the fund. The index is broken down into sections, each representing key risk factors, such as duration, currency, country, rating, and sector. The managers then choose bonds included in the index 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 suffer from illiquidity. According to our research, the extent of sampling for this ETF has tended to be limited. This ETF distributes dividends on a semiannual basis, with historical data showing a January-July payment pattern. IShares engages in securities with the holdings of the ETF. BlackRock acts as investment manager on behalf of iShares. The ETF can lend out up to 100% of net asset value. The average on loan for this ETF in the 12 months to the end of June 2016 was 8.6% for an annualised return of 1 basis point. Lending operations are backed 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 62.5/37.5 between the ETF and BlackRock, respectively.

Gebühren

The annual ongoing charge for this ETF is 0.20%. This is the top end of the 0.09%-0.20% fee range for ETFs tracking EUR-denominated covered-bond market indexes. Within this asset class, the lower fees are levied by ETFs providing sole exposure to the German covered-bond market. Additional costs potentially borne by investors and not included in the ongoing charge 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

An alternative in terms of geographical coverage is the Lyxor EuroMTS Covered Bond Aggregate ETF. It is swap-based and tracks an index that restricts the number of bonds per issuer to just one per maturity segment. The ongoing charge is lower at 0.165%. However, it lags the iShares ETF by a considerable measure in assets under management terms.

The PIMCO Source Covered Bond ETF is actively managed and aims to deliver returns in excess of the Barclays Euro Aggregate Covered Bond 3% Cap Index. The ETF manager invests at least 80% of assets in covered bonds, thus leaving leeway for positions in other fixed-income securities (for example, sovereign) or cash depending on market circumstances. The price for active management is quantified at 0.43%.

Other ETFs provide sole exposure to the German covered-bond market, which limits the yield-enhancing potential. The trade-off is one of lower management fees. The most popular in assets under management terms is the iShares Pfandbriefe, a German-domiciled fund charging 0.10%.

Über den Autor

Jose Garcia-Zarate  is an ETF analyst with Morningstar UK.