Rolle im Portfolio
The focus of the iShares Euro Government Bond 1-3y UCITS ETF on the short-end of the government yield curve and its choice of liquid lines by the largest Eurozone issuers could make it a low-risk alternative to cash holdings in core portfolios for both institutional and retail investors. Current fundamentals continue to be characterised by a general low yield environment for government bonds, particularly for short-dated lines from top-rated Eurozone issuers, of which the index this ETF tracks has a strong focus.
Investors considering this ETF have to make sure they are comfortable with taking on the associated risks of tracking an index that is biased towards low investment-grade-rated Eurozone sovereigns.
This ETF can also play a tactical role as a satellite holding to manage interest risk exposure of fixed income holdings spanning the entire yield curve. The ETF’s focus on the short-dated segment of the curve effectively allows for duration-shortening plays at times of rising interest rates. This would be perhaps better suited for investors with an ability to comprehensively monitor economic developments and their implications for ECB monetary policy.
Fundamentale Analyse
The Eurozone’s challenge is now one of securing a recovery. 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 substantially in H2 2014, which raises fears of prolonged stagnation and even possibly a relapse into recession. The slowdown in global growth weighs on Eurozone exports, while domestic demand remains hamstrung by high unemployment and lack of credit to SMEs. All the while, disinflation has gathered pace.
As a response, the ECB has stepped up its accommodative policy stance. Interest rates were lowered to a historical low of 0.05% in September 2014, with an explicit commitment to keep them low for a protracted period. Additional measures aimed at boosting private loan growth have been enacted, including a programme of purchases of ABS and covered bonds. The ECB is also considering the benefits of a full-scale programme of quantitative easing. All the while, the ECB remains committed to providing liquidity via short and long-term operations. The ECB will be conducting a series of long-term refinancing operations (i.e. 4yr LTROs) aimed at improving bank lending to non-financial private sector (excluding loans for house purchases).
Eurozone sovereign bonds may continue to remain well supported by policy fundamentals - hence meaning very low yields across the maturity spectrum - for the time being, particularly so in the shorter end of the curve.
On a much longer-term timeframe, and assuming an economic recovery, the path of least resistance for bond prices would be south. In that situation of rising yields and tighter monetary policy conditions, the tactical usage of this ETF (e.g. duration exposure management) would come into play.
Indexkonstruktion
The Barclays Euro Government Bond 1-3y Term Index is produced by Barclays Capital. Term indices are a Barclays Capital in-house indexing methodology which uses standard market capitalisation weighting on a bond universe made up of issues near their original maturity term rather than on all bonds within a specific maturity range. The objective of this particular index is to measure the performance of fixed rate conventional short-dated government bonds issued by the Eurozone’s major issuers (i.e. Germany, France, Italy, Spain and the Netherlands). The index is calculated on a daily basis using mid-market prices provided by Barclays Capital market makers towards the close of London trading. The index is reviewed and rebalanced on the last calendar day of each month. The index should contain a minimum of six bonds at re-balancing with a minimum outstanding of EUR 2bn and a minimum remaining life of 1.25 years. The maximum weighting of any one bond is capped at 30% of the index. Income arising from coupon payments is reinvested on a monthly basis at re-balancing, while up to such date it is invested at 1M Euro Libor -15bps set at the end of the month for the next month.
Fondskonstruktion
iShares uses physical replication to track the performance of the Barclays Euro Government Bond 1-3y Term Index. The restricted bond universe which Barclays Capital uses to construct its term indices allows iShares to fully replicate the index constituents in its fund. However, statistical weightings might differ slightly and this could impact on the fund’s tracking performance at the margins. Dividend distribution is done semi-annually, with historical data showing a March-September pattern. As we write (mid October 2014), the fund holds short-dated government paper issued by Germany, France, Italy, Spain and the Netherlands. The fund’s composition showed a strong bias towards bonds issued by Italy (37%), followed by Spain (28%), France (16%), Germany (13%) and the Netherlands (6%). This distribution reflects short-dated issuance patterns for the countries making up the index. For example, France has tended not to be an active issuer of new short-dated lines over the last years, instead meeting a large share of market demand via taps of old medium-dated (e.g. 5y) benchmarks with residual maturity of around 2y. This makes these bonds ineligible to be part of the reference index and thus also of the fund. iShares may engage in securities lending in order to optimise the ETF’s tracking performance. BlackRock acts as investment manager on behalf of iShares. The amount of securities that can be lent is capped to 50% of AUM per fund. The annual average on loan for this ETF in the year out to end Q2 2014 was 31.2%. Lending operations are hedged by taking UCITS-approved collateral greater than the loan value and by revaluing loans and collateral on a daily basis. The collateral is held in a ringfenced account by a third party custodian. The degree of overcollateralisation is a function of the assets provided as collateral, but typically ranges from 102.5% to 112%. Lending revenue is split 62.5/38.5 between the ETF and BlackRock, respectively.
Gebühren
The annual total expense ratio (TER) for this ETF is 0.20%. This is above-average, as a majority of providers charge TERs in the 0.15-0.17% area. 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. There are also rebalancing costs whenever the index changes composition.
Alternativen
The peculiarities of the index this iShares ETF tracks makes it difficult to find a like-for-like alternative in terms of country exposure. However, investors favouring maturity over issuer have plenty of choices.
Measured in AUM terms, the Lyxor EuroMTS Investment Grade 1-3y ETF (TER 0.165%) and the db x-trackers iBoxx EUR Sovereigns 1-3 (TER 0.15%) are second and third to the iShares vehicle. The Lxyor ETF is physically replicated, while the db x-trackers ETF is synthetic. Both track indices which encompass a larger bond universe.
Other ETF providers lag behind in terms of liquidity, although they all charge lower TERs. Amongst these, we find the SPDR Barclays Capital 1-3y EUR Government Bond ETF (physical; TER 0.15%), the Comstage iBoxx EUR Liquid Diversified 1-3 ETF (synthetic; TER 0.12%), the Amundi Government Bond EuroMTS Broad Investment Grade 1-3 ETF (synthetic; TER 0.14%), and the Deka iBoxx EUR Liquid Sovereign Diversified (physical; TER 0.15%).
Investors seeking exposure to the short-dated segment of the Eurozone bond market, but wanting to narrow country exposure can choose from a number of ETFs tracking individual Eurozone country sovereign bond markets (e.g. Germany, France, Italy).
