db x-trackers Euro Stoxx 50® Short Daily UCITS ETF 1C (EUR)

Leveraged and inverse ETFs have attracted a lot of bad press over the past few years because of large losses experienced by investors who didn’t understand the effect of daily compounding and volatility on these funds’ long-term returns. Despite this, these funds have remained very popular as evidenced by the steady amount of assets under management and large daily trading volume.

Investors in Eurozone equities have a lot to thank the European Central Bank (ECB) for since the 2011-12 sovereign debt crisis which threatened to break up the Monetary Union. The Euro Stoxx 50 index has risen more than 70% since Draghi’s pledge in mid-2012 to “do whatever it takes” to preserve the euro. As of this writing, the benchmark hovers above its 2007 pre-crisis highs.

The unprecedented quantitative easing (QE) programme unveiled by the ECB in January 2015 has given investors additional reason to be optimistic about the region. The plan, aimed at combating deflation and stimulating growth, has certainly come at an opportune time, as recent data shows that the Eurozone economy has finally started to accelerate, helped by lower energy prices and a weaker euro.

The ECB has upgraded its Eurozone GDP growth forecasts to 1.5% for this year and 1.9% in 2016. Importantly, the economic expansion is expected to be widespread across the region, with the four biggest countries --Germany, France, Italy and Spain-- all showing signs of more sustainable recovery.

In spite of a more positive domestic macro outlook, downside risks to Eurozone equity valuations remain, not least the ongoing Greek debt crisis. While a Greek exit from the Euro has so far been avoided, it is by no means off the table. The outcome of the discussions with creditors over the country’s economic reforms is highly uncertain.

Elsewhere, although there have been signs of progress, the lack of wide-ranging structural reforms in countries like France and Italy remains a concern too. Fiscal discipline and relaxation of labour laws in these two countries are deemed essential if the ECB’s ultra-loose monetary policy is to be fully effective.

All this said; it should not be forgotten that the components of EURO STOXX 50 index are predominantly large, stable, high-quality companies which do a large amount of business internationally. Some of the largest index components are companies with a large presence in emerging markets -- Latin America in the case of Banco Santander, and Asia in the case of Unilever. These multinationals will continue to benefit from the growth in emerging markets, even if it is expected to be more moderate going forward.

Indexkonstruktion

The EURO STOXX 50 Short Daily index is an index which aims to provide the inverse return of the EURO STOXX 50 Net Return index plus interest (based on EONIA) earned on the investment. The EURO STOXX 50 index includes 50 companies. To be eligible for inclusion a company must be headquartered in a country of the EMU. The index is weighted by free-float adjusted market capitalisation, with each component capped at a maximum of 10% of the index’s overall value. Full reviews are done in September of each year, but there are criteria which can turn over components sooner, such as a merger, bankruptcy or a constituent otherwise slipping from the ranks of the top 75. The financial sector is the biggest sector represented, comprising 24-28% of the index's value, followed by consumer goods (16-20%), and industrials (11-14%). French and German companies account for about 65-70% of the index. Spanish and Italian companies represent another 19-23% and the remainder is spread amongst another eight countries. The index is fairly well-balanced from a single stock perspective. Total is the largest component of the EURO STOXX 50 with a 4-6% weighting. The second and third largest stocks represented are Sanofi and Bayer.

Fondskonstruktion

The fund uses synthetic replication to track the performance of the EURO STOXX 50 Short Daily index. To achieve this return, the fund invests in a fully-funded swap with parent company Deutsche Bank. Under this swap agreement, investors' cash is transferred to the swap counterparty in exchange for the performance of the index. To mitigate counterparty risk, Deutsche Bank post collateral greater than the net asset value (NAV) of the fund, which results in overcollateralisation of the fund. Collateral is held in a segregated account with custodian State Street Bank Luxembourg in Deutsche Bank’s name and pledged in favour of the fund. Collateral is reviewed daily by third party State Street Global Advisors (SSgA). Eligible collateral assets are OECD equities and/or bonds with a minimum of investment grade (government and corporate). Haircuts ranging from 7.5% to 20% are applied for equity collateral, 10% for corporate bond collateral and 0% for government bond collateral. As of this writing, the collateral value is equivalent to 120% of the fund's NAV. Should Deutsche Bank default, the ETF may be terminated, the pledge enforced without giving prior notice to Deutsche Bank, and the collateral liquidated.

Gebühren

The ETF charges a total expense ratio (TER) of 0.40%. It's at the high end of the range for inverse EURO STOXX 50 ETFs. In addition, investors will be charged a 0.50% swap fee, which brings the total estimated holding cost to 0.90% per annum. On top of holding costs, ETF investors will typically be charged trading costs, including bid-offer spreads and brokerage commissions when buy and sell orders are placed for ETF shares.

Alternativen

ComStage and Amundi offer cheaper alternatives (strictly in terms of TER) with TERs of 0.35% and 0.30%, respectively, but these fees may come at the expense of lower liquidity. As these inverse ETFs are only appropriate for short holding periods, investors should probably focus more on considerations such as trading costs and tracking error than annual fee differences of 5 or 10 basis points. Higher liquidity may allow ETF trades to be executed at tighter bid-ask spreads.

For a TER of 0.50% (in addition to a 0.70% swap fee), db x-trackers also offers a double-short EURO STOXX 50 ETF, giving exposure to twice the inverse return of the EURO STOXX 50. Alternatively, the Boost EURO STOXX 50 3x Short Daily ETP provides 3 times the daily performance of the index for a TER of 0.80%. However, investors should be aware that the use of leverage will increase their risk exposure and can lead to greater losses.