Update: ComStage DAX® TR UCITS ETF

Der DAX repräsentiert eher die sehr erfolgreiche deutsche Exportwirtschaft, als dass er ein Spiegel der Gesamtwirtschaft wäre. Zyklische Branchen dominieren diesen mit 30 Aktien begrenzt diversifizierten Index.

Dimitar Boyadzhiev 15.01.2016
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Rolle im Portfolio

This exchange-traded fund is designed for investors who seek exposure to the large-capitalisation segment of the German stock market. It could be used as a core holding for German-based investors or as a tactical tool to manage single-country exposure in a globally diversified portfolio.

The portfolio of companies covers 80%-85% of the German total market capitalisation and consists of 30 blue-chip companies, well-diversified across several sectors. All constituents share one common characteristic: They are export-oriented and therefore not highly dependent on demand from Germany or even broader Europe. Given the global revenue exposure of its constituents, the DAX Index displays high correlations with the MSCI World (85%-90%) and the MSCI Europe (90%-95%) indexes. As such, the diversification benefits of this ETF within a geographically broad-based equity portfolio are very limited.

Investors who want to increase their exposure to the German economy can achieve this through mid-capitalisation equity ETFs, where, comparatively, the companies which comprise the portfolio tend to be more reliant on the domestic market.

With a rock-bottom total expense ratio of 0.08% (cut from 0.12% in 2014), the ComStage DAX ETF is the most competitively priced DAX ETF. As measured by its tracking difference (fund return less index return), this fund has shown above-average performance over the past three years, in comparison with its ETF peers. German-based investors, however, should be aware that as this fund is domiciled in Luxembourg it may not be the most tax-efficient option for them.

ComStage is the ETF brand of Germany’s second-largest bank Commerzbank AG. In terms of assets under management, ComStage is the 12th-largest ETF provider in Europe and the third in its home market. While the firm offers predominantly synthetic ETFs and will continue to do so, it has recently rolled out a number of physically replicated ETFs.

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Fundamentale Analyse

While it is a widely followed benchmark used as a barometer of investor sentiment about the German stock market, the DAX Index is not the best proxy for the German economy given the multinational revenue exposure of its underlying companies. The chemical and automobile sectors make up 35%-40% of the DAX. Though classed as highly cyclical, these industries are recognised globally thanks to their high competitiveness and innovation. Top constituents such as Bayer and Daimler derive over two thirds of their revenues from outside Europe, so their business is less sensitive to economic developments at home.

The key driver for the DAX rallying over 15% for the year to date (November 2015) has been the European Central Bank’s quantitative easing programme introduced in January 2015 and aimed at reviving the eurozone’s economy and boosting inflation. The ECB’s policy has weakened the euro against other major currencies, thus improving the competitiveness of German exporters.

The improved outlook for the eurozone has helped somewhat mitigate the negative effect of the slowdown of emerging markets on German exporters.

Another driver of DAX companies’ performance in 2015 has been global energy prices extending their supply-driven decline. However, being notoriously volatile, energy prices could quickly regain the lost ground. This is one of the main risks when investing in a cyclically oriented, capital-intensive portfolio of companies.

The fund wasn’t immune to the crash of Volkswagen shares in the second half of 2015 following revelations the company had cheated on its diesel emissions. Shares of Volkswagen plunged by as much as 40% in response to the scandal.  The impact on the ETF was limited to a 1.4% loss as the price of the other automotive firms in the index--Daimler, BMW, and Continental--remained stable.

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The DAX is a total return index (dividends are reinvested into the index) made up of the 30 largest and most liquid German companies listed on the Frankfurt Stock Exchange. Altogether they represent 80% of the aggregated Prime Standard segment capitalisation. Individual stocks are weighted on a free-float market-cap basis with capping of 10% to avoid single-name concentration. Consumer goods and basic materials are the index's biggest sectors--both with a 20%-25% weighting, followed by financials (15%-20%) and industrials (10%-15%). Despite a relatively high concentration in the top two sectors, the index’s overall exposure is well-diversified, given the almost even allocations of the remaining sectors and the 10% cap on individual stocks. Amongst the companies with higher weightings are chemical giant Bayer (8%-10%), car maker Daimler (8%-10%), and insurer Allianz (8%-10%). The index weightings and constituents are reviewed and rebalanced on a quarterly basis.

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The ETF uses synthetic replication to track the performance of the DAX on a total return basis. The fund holds a basket of securities, whose performance is given away to the swap counterparty Commerzbank in exchange for the performance of the DAX. The basket of securities consists of European equities (usually Euro Stoxx 50 or DAX companies) and is reviewed and marked to market daily. The fund’s substitute basket is held in a segregated account at the custodian BNP Paribas Securities Services and monitored daily by ComStage’s management company Commerz Funds Solutions SA (a Commerzbank subsidiary), as well as the custodian. Swaps are reset three to four times per year and whenever there is creation/redemption. Instead of resetting the swap when it has a positive marked-to-market value, ComStage requests the swap counterparty to post collateral in between resets. This serves to mitigate counterparty exposure. Collateral is adjusted on a daily basis to ensure that 105% collateralisation of the swap exposure is maintained at all times. The swap collateral consists of German, UK, and/or French government bonds. Currently only German government bonds are used. Up to 100% of the securities held by the fund can be lent to Commerzbank for a fee, which will be fully passed back to the fund. Although this security-lending activity can help improve the fund’s return, it can also introduce additional counterparty risk at the fund level. To protect the fund in the instance of Commerzbank defaulting, borrowed positions are fully collateralised with German bonds. Collateral is held by Commerzbank in a segregated account at Clearstream Banking, Luxembourg.

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With a total expense ratio of 0.08% (cut from 0.12% in 2014), the ComStage ETF is the cheapest DAX tracker currently trading. The tracking difference (fund return minus index return) has ranged from negative 0.18% to negative 0.20% over the past three years, suggesting that the total cost of holding the fund is higher than the TER. Investors should also consider trading costs, including bid-ask spreads and brokerage fees, when buying and selling this ETF.

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German-domiciled investors who are able to claim a refund on the dividend withholding tax, or WHT, paid by the fund can consider three alternatives, which all employ physical replication: iShares Core DAX (TER: 0.16%), Deka DAX (TER: 0.15%), and ComStage 1 DAX (TER: 0.15%). The iShares and Deka funds have similar annual holding costs (ranging from 0.15% to 0.20%), as measured by tracking difference (fund return minus index return). Both are accumulating funds. The ComStage 1 DAX ETF distributes income, but being launched in Oct 2015, it has no performance history.

Nondomestic investors can take advantage of the double tax treaty between Germany and Luxembourg, which effectively reduces the WHT to 15%. Alternatives include db x-trackers DAX (DR) 1C (TER: 0.09%) and Lyxor DAX (DR) ETF (TER: 0.15%). Both are physically replicated accumulating funds. Investors seeking income can look at fully replicated db x-trackers (DR) – Income 1D (TER: 0.09%) and synthetic ComStage FR DAX ETF (TER: 0.15%).

Investors seeking broader exposure to the German equity market can consider Amundi MSCI Germany ETF. It levies an annual fee of 0.25%. It provides access to a portfolio of 54 large- and mid-cap companies. This fund is offered in both income and accumulating share classes.

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Über den Autor

Dimitar Boyadzhiev  Dimitar Boyadzhiev ist Fund Analyst, European Passive Fund Research