Rolle im Portfolio
The ETFlab Dt. Boerse EUROGOV Germany 3-5 ETF offers investors exposure to the 3-5y maturity spectrum of the German government bond market. Given the current low yield environment and concerns over credit quality of some eurozone sovereign issuers, investors looking to equitise their cash may find this German government debt ETF a more suitable investment to ride out the volatile times.
Investors can also consider this ETF to hedge fixed income holdings encompassing riskier issuers or as a vehicle for capital preservation. Despite the unlikelihood of a German default, this ETF's medium-dated bias (duration around 3.7%) makes it less optimal for capital preservation purposes than an ETF with a shorter maturity. Typically, shorter-term maturities and more liquid offerings will be better suited to capital preservation uses as this tends to minimise investment risk. Whilst going out further on the maturity spectrum poses some additional risks in the form of greater duration, investors may consider Germany a high enough rated issuing authority to consider the risk worth taking to capture some extra yield.
Tactically-minded investors can use the ETF to manage interest rate risk exposure within a broader portfolio of fixed income holdings spanning the entire curve. This ETF's 3-5y maturity bias provides investors with the more versatility to micro-manage duration on the upside and the downside than otherwise similar short-dated or long-dated maturity ETFs. As a result, we would argue that the tactical use of this ETF in this manner is likely best suited to institutional investors as it involves a good understanding of yield curve dynamics and the extensive monitoring of economic developments and ECB monetary policies.
Fundamentale Analyse
The eurozone sovereign debt crisis has catapulted sovereign risk to the forefront of current pricing dynamics shaping the eurozone government bond market. Prior to the onset of the crisis, markets had largely adhered to the theoretical notion of economic convergence between eurozone members allowing for the spreads relative to German Bunds to shrivel to near zero. As the crisis unfolded, it became apparent that the theoretical elimination of country-specific risk was a fundamentally flawed thesis from the start. Due to this shift in risk perceptions, Germany has recaptured its pre-euro era status as the region's lynchpin. As a result, German bond yields have fallen to historical lows, while cross-country bond spreads to Germany, particularly of the eurozone's periphery members, have widened significantly; reverting to pre-eurozone levels in some instances.
Following the sea change in the eurozone, Germany has taken the opportunity to reassert itself as the region's monetary anchor and has begun to direct policy towards fiscal convergence. At the December 2011 EU summit, Germany and France championed a 'fiscal pact' whereby member states committed to imposing stricter deficit reduction policies and austerity measures across the eurozone. Structural reforms like these take time to implement, however, and more immediate actions have been needed to quell market uncertainty. With the willingness of her fellow member states to enact stricter fiscal measures, Germany has lent its support to the creation and increased firepower of the European Financial Stability Facility, the continuation of Greek bailouts, and the increasingly favourable lending terms offered by the European Central Bank (ECB).
Germany remains the eurozone's economic engine with GDP growth in 2011 outpacing the eurozone's despite registering a -0.2% growth for Q4. Relative to its peers, the German economy has been bolstered due to the strength of demand for its exports, particularly from Asian emerging countries. This performance has allowed Germany to post its lowest jobless rate since 1991. Economists have warned that the German economy could realise slower growth in 2012 if export demand were to fall due to worsening global economic conditions. For example, China has registered sharp declines in its imports in January 2012. Meanwhile, the economic health of some of Germany’s eurozone partners remains severely hampered by the austerity programmes implemented to deal with the sovereign debt overhang. Despite these risks, in its December 2011 report the Bundesbank indicated that industrial production and construction were expected to remain areas of economic strength.
Looking ahead, the outlook for the eurozone sovereign debt market remains in a state of tremendous fluidity, as the January round of ratings downgrades by S&P - including the loss of AAA by France, Austria and the EFSF - showed. The mild tightening cycle of mid-2011 has been fully reversed, with ECB short-term and 3y interest rates down to 1.00% as we write. The downward trend in the current inflation rate, and more importantly, the lowering of medium-term inflation expectations towards the ECB’s price stability target of around 2.0%, bodes well for a protracted period of ultralow interest rates.
Indexkonstruktion
The Deutsche Borse EUROGOV Germany 3-5y index is produced and disseminated by Deutsche Borse and aims to track the performance of the 3-5y maturity segment of the Germany sovereign debt market. Interest payments are reinvested into the index as soon as they are paid. The index employs a market capitalisation methodology to determine index weights. In general, highly liquid bonds with a higher nominal value and shorter time to maturity are preferred. Index constituents must be fixed rate bonds with a minimum outstanding of EUR 4bn. For those German sovereign bonds meeting this criteria, the index chooses the 15 most liquid and will not hold more than 15 constituents. Index constituents are weighted according to their total amount outstanding. The index employs a cap to limit the size of any one constituent to 30% of the overall index value. The index rebalances quarterly.
Fondskonstruktion
ETFlab uses physical replication methods to track the performance of the Dt Boerse EUROGOV Germany total return index. The fund buys all the securities within the index, in the same weightings as stipulated by the index. ETFlab makes 100 % of the fund’s securities available for lending. All revenues generated through securities lending are passed on to the fund. Although this activity can help to partially offset the TER, it exposes investors to counterparty risk. To protect the fund from this counterparty risk, ETFlab takes collateral greater than the value of the borrowed securities. Collateral levels vary from 102% to 105%, depending on the assets provided as collateral and on the credit quality of the borrower. The ETF distributes dividends quarterly. The fund is domiciled in Germany and its base currency is Euros.
Gebühren
ETFlab charges a total expense ratio (TER) of 0.15% for this ETF, which falls in line with other funds in this category.
Alternativen
According to our research, the closest alternative to the ETFlab Dt Boerse EUROGOV Germany 3-5y ETF is the iShares eb.rexx Government Germany 2.5-5.5 ETF. The iShares ETF is physically replicated and the most popular ETF in the European market tracking this particular segment, with assets under management (AUM) above EUR 850mn as we write. Further down the AUM scale, we find ComStage’s iBoxx Euro Sovereign Germany Capped 1-5y TR ETF, a swap-based, non-coupon distributing vehicle with a lower TER of 0.12%. Investors should note that this ComStage ETF tends to have a shorter-dated bias given its inclusion of 1-2y maturity issues.
Investors searching for more liquid alternatives above and beyond the iShares ETF would have to compromise on country exposure and choose amongst the array of ETFs tracking the performance of the short-to-medium-dated segment of the Eurozone government bond market. Amongst these we highlight the Lyxor EuroMTS AAA Macro-Weighted (TER 0.165%), and db x-trackers iBoxx Euro Sovereigns (TER 0.15%) family of ETFs. These Lyxor and db x-trackers ETFs are swap-based and track pan-Eurozone rather than German-centric indices, although iBoxx excludes non-investment grade issuers. Still, investors considering these vehicles should make sure they are comfortable taking on exposure to non-German government bonds.
