Update: db x-trackers II EONIA UCITS ETF

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, retail investors may see this ETF 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, though up from the crisis lows, remains well below potential and rather uneven amongst its member constituents. Besides, renewed downside risks have increased into 2015. Meanwhile, inflationary pressures have been absent since the start of the economic crisis. In fact, disinflation gathered pace in 2014, particularly so since the collapse of oil prices, and Eurozone headline HICP ended the year in negative terrain, raising the odds of a deflationary phase taking hold. 

As a response, the ECB has stepped up its accommodative monetary policy stance. In January 2015, the ECB announced a massive quantitative easing programme involving the purchase of 60bn Euros of government bonds on a monthly basis until, at the earliest, September 2016. Meanwhile, back in September 2014, interest rates had been lowered to a historical low of 0.05% and the deposit rate to -0.20%, with an explicit commitment to leave at, or around, these levels for a very protracted period. All the while, the ECB remains committed to providing liquidity via short and long-term operations. 

Relevant money market rates, such as EONIA, track the movements in ECB interest rates. Before 2008, EONIA used to track the ECB’s main refi rate. However, when the Eurozone crisis hit and interbank lending froze, commercial banks started to park their cash en masse at the ECB. As a result, EONIA started to track the much lower ECB deposit rate, with obvious consequences for the performance of EONIA-tracking financial instruments.

The easing of tensions in the Eurozone since mid-2012 has allowed commercial banks to become increasingly less reliant on ECB support, in turn setting the right conditions for interbank lending to gradually normalise. As such, in 2014 EONIA reverted to track the ECB refi rate. However, given the monetary policy outlook in the Eurozone, EONIA should only be expected to remain at exceptionally low levels. Indeed, EONIA averaged just 0.09% in 2014, though for the best part of H2 2014 it was in negative terrain. Early indications in 2015 suggest that EONIA is likely to remain in negative terrain for the foreseeable future.

Indexkonstruktion

The Deustche Bank EONIA Total Return Index is calculated and disseminated on a daily basis by Deustche Bank. It aims to reflect the performance of Eurozone money markets by measuring 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). The deposit is compounded daily on a 360 day year convention. The EONIA rate used is based on the European close rate as published in Reuters. The Deutsche Bank EONIA index has an inception date of 31-Dec-1998 with a level of 100. 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

db x-trackers uses synthetic replication to track the Deutsche Bank EONIA Index. The db x-trackers II EONIA TRI ETF is an umbrella vehicle encompassing four different classes (e.g. 1C, 1D, 2C, 3C). The C share classes are income capitalising, while the D distributes dividends. The 1C ETF is by far the most popular, taking up over 90% of assets under management (AUM). For its range of money market ETFs, db x-trackers uses the unfunded swap model. The ETF manager buys a basket of securities (i.e. substitute basket) from Deutsche Bank 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. Our research shows that the substitute baskets for db x-trackers money market ETFs tend to be made up of high-quality bonds (e.g. top-rated Eurozone government). This can be complemented with cash deposits and government-backed stock from non-EU issuers (e.g. US Treasuries). A snapshot at the time of this writing (late January 2015) showed that the ETF’s substitute basket was made up of high-quality sovereign and corporate bonds on a 85/15 split. According to UCITS III regulations, individual counterparty risk exposure is limited to 10% of the fund’s NAV at any point in time. In essence, as db x-trackers is a subsidiary of Deutsche Bank, counterparty risk arising from swap transactions ultimately remains within the same financial group. According to our research, in the case of fixed income and money market ETFs, db x-trackers has a generic policy of re-setting swaps to zero when counterparty exposure reaches 5% of NAV and/or whenever there is creation or redemption of units. The frequency of swap resetting can be daily. db x-trackers does not engage in securities lending with the substitute basket’s holdings.

Gebühren

The annual total expense ratio (TER) for this ETF is 0.15%. This is the top-end of the 0.10-0.15% TER range for EONIA-tracking Eurozone money market ETFs. As this ETF uses synthetic replication there are also swap costs to consider. 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. However, investors should be aware that there is no uniform way of capturing its performance. 

Like-for-like alternatives to the db x-trackers II EONIA TRI ETF include the Lyxor Euro Cash ETF (variable TER structure with a maximum of 0.15%) and Comstage EONIA ETF (TER 0.10%). All these swap-based ETFs track an index replicating the performance of a daily rolling deposit invested at EONIA. 

Investors looking for above-EONIA returns could consider the PIMCO Source Euro Enhanced Short Maturity Source ETF. This 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%.

Other alternative ways of accessing the Eurozone money market include ETFs tracking indices measuring the performance of the Eurozone ultra-short government bond or T-bill market. Amongst these, we find 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%). 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.