Analyse: Lyxor ETF IBEX 35

Fundamentale Analyse

The Spanish stock market, as measured by the IBEX 35 index, has experienced a turnaround in fortunes. Having lost 60% of its value from the pre-crisis highs of 2007 to the lows of mid-2012, it has rebounded strongly since, to become one of the best performing in Europe. This has come against the backdrop of rising sentiment towards global equities; an improved domestic macro outlook plus easier and cheaper access to international funding by Spanish companies; particularly banks. 

Despite the rebound, as we write – late November 2013 – Spanish equities remain in undervalued territory. As such, investors may see them as an interesting tactical buy opportunity, not least given the international dimension of most companies making up the IBEX 35. Indeed, truly multinational companies such as telecoms giant Telefonica or world’s top retailer Inditex continue to grow their business at a healthy pace beyond Spain’s geographical confines. However, downside risks to valuations going forward may arise from less upbeat prospects for emerging markets from which many of these companies derive substantial revenue.

On a domestic note, the Spanish economy is experiencing a hard and long-drawn road towards recovery. Q3-13 saw the end of a two-year recession, with GDP growing by 0.1% q/q. Expectations are for a very gradual improvement in 2014 (e.g. 0.5-1.0%) and beyond; though not strong enough to make a substantial dent to a jobless rate, which, at 26%, is one of the highest in the developed world.

Although macroeconomic readings still convey a challenging picture, expectations have improved substantially. The relaxation of Eurozone sovereign debt market tensions has eased the government’s financing, while opening up previously closed international funding markets for large-cap Spanish corporations. Meanwhile, a comprehensive clean-up of bank balance sheets from bad loans linked to the housing bubble is well underway. Besides, Spanish banks have dramatically reduced their reliance on ECB liquidity. We have gone from a situation where Spanish banks, previously a risky proposition, are now described as amongst the safest in Europe. 

However, the improvement financing terms for some economic agents has yet to feed through to SMEs, which are the backbone of the economy. As such, Spain still faces a few tough years ahead. Domestic demand remains hamstrung by very challenging labour market conditions and the widespread income squeeze. Meanwhile, the various structural reforms undertaken – most notably those affecting labour market relations – will take time to yield meaningful results. And yet, it is precisely these reforms, plus the sustained easing of financing terms, that is setting the basis for a stronger and more competitive performance. In fact, aided by substantial drop in unit labour costs, export growth is proving very strong, to the point that Spain has fully closed the double-digit current account deficit of the pre-crisis years. As such, the focus for investors looking at Spain should be in medium to long-term opportunities.

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Indexkonstruktion

The IBEX 35 is a market capitalisation weighted index which comprises the 35 most liquid Spanish stocks traded on the Madrid Stock Exchange. The index is reviewed twice a year in June and December by a technical advisory committee. In order to be considered for inclusion, the average free float market capitalisation of the stock must be at least 0.30% of the total market capitalisation of the index. Financials is the biggest sector represented in the IBEX 35, accounting for around 35-40% of its value, followed by telecommunications (15-20%), utilities (10-15%) and industrials (around 10%). The IBEX 35 index is extremely top heavy from the perspective of individual names. As of this writing, the six largest components (e.g. Banco Santander, Telefonica, BBVA, Inditex, Iberdrola and Repsol) account for around 70% of the index’s total market capitalisation. Meanwhile, the individual statistical weightings of the remaining stocks stand in a 0.10-3.00% range.

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Fondskonstruktion

Lyxor uses synthetic replication to track the performance of the IBEX 35 total return index. This ETF was launched in October 2006 and is domiciled in France. Lyxor uses the unfunded swap model. The ETF buys a basket of securities (i.e. 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 blue-chip shares, largely European and with a minimum of 75% of the basket composed of stocks from Eurozone-based companies. It is not unusual for the fund not to contain many of the stocks that make up the benchmark index. In fact, a snapshot of the substitute basket as of this writing (e.g. late November 2013) showed it contained 11 of the IBEX 35 components, with a combined value of 11.5%. Of the remaining substitute basket components, in value terms, over 50% were in German stocks, while non-Eurozone equities – mainly Japanese – accounted for around 10%. 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.

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Gebühren

The annual total expense ratio (TER) for this ETF is 0.30%. This is towards the top-end of the TER range (e.g. 0.25-0.33%) for ETFs giving plain vanilla long exposure to the Spanish large-cap equity market. 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.

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Alternativen

As of this writing, measured in AUM terms, the Lyxor IBEX 35 ETF is the largest ETF providing exposure to the Spanish large-cap equity market.  

The db x-trackers IBEX 35 ETF, a swap-based ETF also charging a TER of 0.30%, now stands in second place in AUM terms. Not far behind we find the BBVA Acción IBEX 35, a physically-replicated ETF charging a higher TER of 0.33%. Meanwhile, further down the AUM scale, we find the Amundi ETF MSCI Spain. It charges a lower TER of 0.25%, but it tracks a different index, namely the MSCI Spain, which comprises fewer components than the IBEX 35.

Investors interested the broader Iberian region rather than just the Spanish market could look at the ESAF NYSE Euronext Iberian ETF (TER 0.45%). This physically-replicated fund tracks an index comprising the 20 most liquid companies listed in the Madrid Stock Exchange and the 10 most liquid companies listed on Euronext Lisbon. 

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