Analyse: Lyxor ETF EuroMTS AAA Macro Weighted Government Bond

Dieser Bond-ETF ist nicht nach der Höhe der Schulden, sondern nach makroökonomischen Faktoren gewichtet. Auch nach dem Downgrade bleibt Frankreich enthalten. 

Jose Garcia-Zarate 23.11.2012

Rolle im Portfolio

The Lyxor EuroMTS Macro-Weighted AAA Government Bond ETF – previously Lyxor EuroMTS AAA Government Bond - offers investors exposure to the entire maturity spectrum of top-rated Eurozone government bonds. The ETF tracks a fundamentally-weighted index which assigns individual country weights on the basis of a series of key macroeconomic indicators. This aims to address commonly cited pitfalls of market capitalisation fixed income indices such as the over-exposure to heavily indebted constituents.

The restriction in terms of credit rating and the reference to a macro-weighted fixed income index afford this ETF something of a dual role in a Eurozone-centric investment portfolio. Investors with low tolerance to risk are likely to use it as a core fixed income building block, offering the necessary counterweight to Eurozone equity fund exposure; particularly useful at times of economic downturn. Meanwhile investors with a more daring attitude to risk may prefer to use it as a satellite component, a sort of hedge or cushion to a core made up of an ETF encompassing all Eurozone issuers irrespective of credit standing.

This ETF can also work tactically, either as a complement or a hedging tool for investment portfolios with exposure to other geographical areas within the fixed income universe (e.g. UK, emerging European markets). However, foreign exchange considerations would need to be taken into account, particularly so if the ETF is to be used as part of a hedging strategy.

Exposure to the entire maturity spectrum makes this ETF best suited to shield the overall investment portfolio against negative performance effects arising from market shifts across the yield curve, whether near-term tactical or long-term strategic in nature.

Fundamentale Analyse

Sovereign risk has been the key factor shaping pricing dynamics in the Eurozone government bond market since late 2009. The political management of the Eurozone debt crisis, although rather haphazard, has produced some relevant events such as the creation of financing vehicles such as the European Financial Stability Facility (EFSF) and its permanent replacement the European Stability Mechanism (ESM); the approval of the “Fiscal Compact” – to come into force in January 2013 – binding 25 EU countries to a stringent set of fiscal responsibility rules, and the first steps towards some kind of Eurozone banking union with the European Central Bank (ECB) as supervisory entity.

Despite these relevant political moves, market concerns about the long-term financial health of the Eurozone have not disappeared. Perceptions of sovereign risk have changed significantly; possibly for good. We have gone from a pre-crisis situation where markets happily adhered to the notion of almost perfect substitution between sovereign bonds of Eurozone issuers, to one where bonds from the peripheral issuers now carry a sizeable risk premium vis-à-vis the German Bund and other top-rated issuers. In fact, spreads between Germany and the rest of the AAA-rated countries have also widened from pre-crisis levels, thereby cementing Germany’s lynchpin status in the Eurozone government bond market.

The diverging perceptions of risk have also been influenced by the disparities in economic performance between the core and the periphery. Most economic indicators for the coming few years point to an overall weak growth environment, though one where core economies such as Germany, France and the Netherlands would continue to outperform a Eurozone periphery undergoing severe programmes of budgetary consolidation.

This general pricing backdrop is expected to be maintained even in a post-crisis scenario where tensions on peripheral government debt diminish. The ECB introduced in September 2012 the so-called “Outright Monetary Transactions” (OMT) programme, whereby the central bank would purchase unlimited amounts of peripheral government debt in the secondary market upon request from a government in exchange for this to adhere to a strict programme of reforms supervised by the EU and IMF. As of this writing no government has called on the ECB to activate the OMT programme, but it is assumed that Spain, and probably Italy, would if faced with sticky high financing costs for their public debt going forward. The assumption is that ECB intervention would help lower yields of peripheral debt to sustainable levels, though whether this would be met with a increase of a similar magnitude in the yields of core debt remains an open question.

Against this backdrop, the ECB maintains a very accommodative monetary policy stance, with interest rates cut to a historically low of 0.75% from 1.00% in July 2012. This level remains in place as of this writing, although expectations are for further easing should downside risks to the Eurozone economic outlook materialise and inflation expectations remain in check. The ECB also remains focused on the issue of financial stability, routinely providing ample liquidity at favourable terms to the Eurozone banking sector.

Indexkonstruktion

The EuroMTS AAA Macro-Weighted Government index measures the performance of the Eurozone’s top-rated conventional government bonds with minimum maturity of one year quoted on MTS platforms. Eligible bonds must have at least two AAA credit ratings from the three main rating agencies and a minimum outstanding of EUR 2bn. The index must have a minimum of five countries. If a country is downgraded and its exclusion means the index would be left with less than five issuers, then such country remains in the index until a new country is upgraded to take its place. As we write eligible countries are Germany, France, Netherlands, Austria and Finland. Each is represented by all the bonds meeting the eligibility criteria. Country weights are based on GDP data and then adjusted by applying the average of the standardised figures of four macroeconomic indicators as a premium or discount depending on whether the aggregate metric is positive or negative. The adjustment factor is calculated on data for the last available eight quarters on government debt (% of GDP), current account balance (% of GDP), quarterly GDP growth and long-term interest rates. Macro data is updated quarterly, while individual bond weights are adjusted monthly due to changes in market capitalisation. This is a total return index with coupons reinvested overnight. Calculations are done in real time with three price fixings in the trading session using MTS system bid prices. The index is rebalanced monthly.

Fondskonstruktion

Lyxor uses synthetic replication to track the EuroMTS Macro-Weighted AAA Government index. This ETF was launched in April 2009 and is domiciled in France. The Lyxor EuroMTS AAA Macro-Weighted Government Bond ETF does not distribute dividends. Lyxor uses the unfunded swap model. The ETF buys a basket of securities (ie. substitute basket) from Societe Generale while simultaneously entering into an OTC total return swap agreement to receive the performance of the benchmark index of reference (net of fees) in exchange for that of the substitute basket. The substitute basket for Lyxor’s range of fixed income ETFs is generally made up of EUR-denominated fixed income securities, both government-backed (e.g. sovereign, regional, agency) with a minimum rating of A- and corporate with a minimum rating of BBB-. The fund manager engages in dynamic allocation of the basket of bonds in order to seek the highest possible correlation with the evolution of the EuroMTS benchmark of reference. It would not be unusual for the fund not to contain many of the bonds that make up the underlying index the ETF aims to track. A snapshot of the fund’s basket as of writing (mid-November 2012) this report showed it was entirely made up of a mix of government and public agency bonds and strips from AAA-rated Eurozone countries. According to UCITS regulations, individual counterparty risk exposure is limited to 10% of the fund’s NAV at any point in time. According to our research, the OTC swap is not collateralised, which effectively exposes the investor to a loss of up to 10% of the NAV if the swap counterparty defaults. However, Lyxor is now committed to target zero swap exposure on a daily basis and is also considering the virtues of adopting an overcollateralised structure. Lyxor does not currently engage in securities lending, which may help to reduce overall counterparty risk.

Gebühren

The annual total expense ratio (TER) for this ETF is 0.165%, at the top-end of the 0.14-0.165% range for the existing offering of ETFs providing exposure to the performance of the restricted universe of AAA-rated Eurozone government bonds. 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 we write, the Lyxor EuroMTS Macro-Weighted AAA Government Bond ETF remains significantly well ahead of its like-for-like competitors in terms of market share, virtue of having come to the marketplace almost a year ahead of both the db x-trackers iBoxx EUR Sovereigns Eurozone AAA (TER 0.15%) and the Amundi ETF AAA Government Bond EuroMTS (TER 0.14%), both swap-based ETFs tracking market capitalisation-based indices. Assets under management in each of these funds stand around 20% of those in the Lyxor vehicle, which might weigh on tradability.

Those looking for similarly liquid alternatives to the Lyxor ETF but unwilling to compromise on credit rating and exposure to the broad maturity spectrum will have little option but to consider the array of ETFs offering exposure to the German government bond market. Amongst these, the iShares eb.rexx Government Germany, a physically replicated fund charging a TER of 0.15%, remains the most popular ETF.

Other ETFs offering a German-centric exposure, but lagging in liquidity vs. the iShares fund include the ETFlab’s Deutsche Boerse EUROGOV Germany (physical; TER 0.15%), the db x-trackers iBoxx EUR Germany (synthetic; TER 0.15%) and the Source PIMCO German Government Bond ETF (physical; TER 0.15%).

Über den Autor

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