Rolle im Portfolio
The Lyxor Euro Cash ETF is a money market ETF offering investors the possibility to invest cash holdings without incurring a significant level of risk. The main objective is one of providing a bullet-proof and highly flexible vehicle to invest cash on fairly short-term horizons. The trade-off is one of returns, with money market funds in general aiming at best to marginally better prevailing money market rates. In the case of this Lyxor ETF, the objective is that of replicating the return of a rolling deposit invested daily at EONIA (i.e. the overnight reference rate for the Euro computed as a weighted average of all overnight unsecured lending transactions undertaken in the banking system).
In our view, the Lyxor Euro Cash could play a role as a core holding in an investment portfolio as a near-perfect substitute for outright cash positions. Some investors may also see money market funds as a vehicle to neutralise the so-called “cash drag” (e.g. the diminishing effect on overall returns of holding rather than investing cash). Investors wanting to make use of a money market ETF for cash management purposes will have to carefully consider whether the returns on offer are financially attractive relative to alternative vehicles measured against key economic variables (e.g. interest rates, inflation).
The appeal of this ETF as a cash management instrument is enhanced by its daily real-time tradability, generally at lower costs than traditional money market funds. This could make this ETF a useful tool for institutional investors with an active need to financially optimise the use of cash holdings. Meanwhile, for retail investors, a key appeal of this ETF is likely to be as an alternative to bank deposits. In general, retail investors are likely to consider money market ETFs on longer-time horizons than institutional investors.
Fundamentale Analyse
The Eurozone’s economic performance has seen a gradual improvement through 2013. Perceptions about the Euro have changed for the better since the European Central Bank (ECB) verbalised an unequivocal commitment to ensuring its survival. Besides, although there still is a performance gap between core and peripheral economies, the latter are now showing some credible signs of a turnaround. Having said that, overall, the recovery remains fragile and subject to downside risks, while unemployment, particularly in the periphery, remains at very high levels.
The Eurozone has experienced a distinct lack of inflationary pressures since the start of the economic crisis. However, the disinflation process has accelerated in 2013, on a mix of lower international commodity prices, a strong Euro and the cost-competitiveness adjustment undertaken in the periphery. In fact, inflation rates in some peripheral economies are in negative terrain. With Eurozone HICP inflation below 1.0% and progressively deviating further from the price stability target of close to 2.0% y/y, the ECB decided to cut interest rates to a historical low of 0.25% at its November 2013 policy meeting. The ECB deposit rate was left unchanged at 0.00%. In addition, the ECB signalled that very loose – perhaps even looser – monetary settings shall remain in place for a protracted period.
Relevant money market rates have broadly tracked the movements in ECB interest rates. EONIA went down from an average of close to 3.9% in 2008 to 0.71% in 2009 and further down to 0.44% in 2010. It picked up to 0.87% in 2011 to reflect the effects of the ECB’s short-lived tightening cycle that year. However, EONIA resumed a clear downward trend into 2012, finishing the year at an average of 0.23%, and has pushed further down in 2013 (e.g. 0.08% average as of this writing) to reflect the resumption of the ultra-loose policy stance.
Aside from conventional monetary policy measures, the ECB remains focused on the issue of financial stability by routinely providing ample liquidity at very favourable terms to the Eurozone banking sector. The impairment of interbank lending channels since the start of the crisis has had a direct effect on EONIA. Before the crisis, EONIA used to track the ECB’s main refi rate. However, with interbank lending frozen, commercial banks have been parking their cash en masse with the ECB. As a result, EONIA now tracks the much lower ECB deposit rate, currently at 0.00%, with obvious consequences on the performance of any EONIA-tracking financial instrument.
The lowering of the ECB deposit rate to 0.00% - with suggestions that it could be even pushed down to negative levels – is designed to kick-start the interbank lending market. Meanwhile, the improvement of perceptions vis-à-vis the Euro has also produced some positive developments (e.g. commercial banks becoming less reliant on ECB funding). However, full resumption of normal lending practices still remains a somewhat distant prospect. As such, EONIA should be expected to continue tracking the ECB’s deposit rate for the foreseeable future.
Indexkonstruktion
The EuroMTS EONIA Investible index measures the total return of a rolling deposit invested daily at EONIA (i.e. the overnight reference rate for the Euro computed as a weighted average of all overnight unsecured lending transactions undertaken in the banking system) and settled on a T+3 period basis. The EuroMTS EONIA Investible index has been specifically designed as a benchmark for investors seeking an exposure to EONIA through exchange traded instruments and closely tracks the EuroMTS EONIA Index, which is calculated using a T settlement period. EuroMTS EONIA indices are calculated daily on a total return basis with price fixings of 09:00 CET. EONIA is sponsored by the European Banking Federation (EBF), which represents the interest of some 5000 European banks, and by the Financial Markets Association (ACI). EONIA is computed with the help of the European Central Bank (ECB). The banks contributing to EONIA are the banks with the highest volume in the Eurozone money markets. The panel of banks contributing to EONIA currently consists of 49 banks. Since its launch in January 1999, EONIA has become the underlying rate of numerous financial derivatives.
Fondskonstruktion
Lyxor uses synthetic replication to track the EuroMTS EONIA Investible index. This ETF was launched in September 2007 and is domiciled in France. The Lyxor EuroMTS Euro Cash 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 is generally made up of a basket of EUR-denominated fixed income securities, both government-backed (e.g. sovereign, regional, agency) and corporate. A snapshot of the fund’s basket as of writing (e.g. late November 2013) showed that Eurozone sovereign and quasi-government bonds accounted for 70% of the basket, while 24% were covered asset-backed (e.g. covered) bonds and the remaining 6% corporate bonds. According to UCITS regulations, individual counterparty risk exposure is limited to 10% of the fund’s NAV at any point in time. However, Lyxor targets zero swap exposure per individual ETF on a daily basis, while in practice the swap level tends to be negative, thus effectively meaning over-collateralisation. For their suite of synthetic ETFs, Lyxor does not engage in securities lending.
Gebühren
This ETF works on a variable annual total expense ratio (TER) structure in which 0.15% is a maximum. Depending on market and/or corporate circumstances, investors may end up paying substantially less. The maximum TER of 0.15% is at the top-end of the 0.10-0.15% TER range for EONIA-tracking money market ETFs. 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
Most European ETF providers offer products providing exposure to the Eurozone money market. Although there is no uniform definition as to what best represents its essence, a majority of ETFs opt to track indices reflecting the return of deposits invested in EONIA. In terms of assets under management (AUM), Lyxor’s main competitor is the db x-trackers EONIA TRI ETF, also swap-based and charging a TER of 0.15%. Lagging in AUM terms we find the Comstage EONIA ETF (TER 0.10%), Amundi EONIA ETF (TER 0.14%) and iShares EONIA (TER 0.14%). All these ETFs are swap-based.
The PIMCO Source Euro Enhanced Short Maturity Source ETF is an actively managed ETF aimed at outperforming EONIA by investing in a higher-yielding mix of corporate and government bonds with short maturity. The price for active management comes in the shape of a TER of 0.35%.
Investors looking for alternative ways of accessing the Eurozone money market may consider the Amundi Cash 3M EuroMTS Investment Grade (synthetic; TER 0.14%), PowerShares EuroMTS Cash 3M ETF (physical; TER 0.15%) or the iShares EUR Government Bond 0-1 (physical; TER 0.20%), all tracking indices measuring the performance of the Eurozone ultra-short government bond or T-bill market.
Meanwhile, the physically replicated iShares eb.rexx Germany Money Market ETF (TER 0.13%) and Deka Deutsche Boerse EUROGOV Germany Money Market ETF (TER 0.12%) restrict exposure to the market of ultra-short German government bonds.
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