db x-trackers II iBoxx EUR Germany 1-3 TRI ETF 1D (EUR) | D5BC |
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Jose Garcia-Zarate27.03.2013
Hensiktsmessighet
The db x-trackers iBoxx Germany 1-3 ETF offers investors exposure to the performance of the short-dated segment of the German government bond market. The short-dated maturity focus and the security afforded by Germany as a sovereign issuer make this ETF a very low-risk alternative to EUR-denominated cash holdings or other money market instruments in core investment portfolios, both for institutional and retail investors. In principle, the restricted geographical market coverage of this ETF would make it more suitable for investors with German-centric investment portfolios. However, the mix of economic fundamentals since the onset of the Eurozone sovereign debt crisis has conferred German government bonds the added benefit of safe-haven asset of choice for the wider Eurozone investment community.
This ETF can also play a tactical role as a satellite holding geared to managing interest rate risk exposure of fixed income holdings spanning the entire curve. The ETF’s short-dated maturity focus would allow for duration-shortening plays in times of rising interest rates. This use is probably best suited to institutional investors, as it calls for close monitoring of economic developments and their implications for ECB monetary policy.
The ETF tracks the performance of an index which is partly made up of Germany 2y bonds (Schatz) whose pricing dynamics may be affected by the roll of contracts in the futures market. Institutional investors might be best suited to understand these pricing dynamics, but as a rule, all newly issued German Schatz acquire cheapest-to-deliver status for Schatz futures contracts. This ensures a body of demand for the cash bond that might drive prices higher as roll time nears, while Schatz no longer serving such purpose could see a price drop.
Fundamentalt syn
The Eurozone debt crisis has allowed Germany to recapture the lynchpin role within the Eurozone government bond market. Since the introduction of the Euro and up to the crisis markets had adhered to the theoretical notion of economic convergence between Eurozone constituents; allowing for the almost elimination of spreads to Germany. As the crisis unfolded, Germany became the end beneficiary of intra-Eurozone risk-aversion flows predicated on fears that the Euro project could crumble. As a result, German government bond yields fell to historical lows (e.g. Germany has been able to sell short-dated bonds at negative yields), while cross-country bond spreads to Germany, particularly for periphery issuers, widened substantially. The verbal intervention by the ECB President Mario Draghi “to do whatever necessary to save the Euro” in the summer of 2012 allowed for some correction in cross-country spreads, though mostly driven by a decline in peripheral bond yields rather than an increase in those of Germany.
In this situation the German government has become the de facto shaper of economic policy in the Eurozone. Severe budget deficit reduction strategies have been imposed at the behest of Germany on her Eurozone partners in exchange for Berlin’s support for some unpalatable compromises (e.g. sovereign bailouts and the setting up of the European Stability Mechanism). The net effect of this policy drive so far has been that of widening a growth gap between core and peripheral Eurozone economies to the benefit of the former but also forcing the latter to undertake much needed structural reforms. The export-oriented German economy posted an impressive recovery from the depths of the post-Lehman recession, and although the pace of GDP growth slowed in 2012, the premise of German outperformance remains solid.
The ECB maintains a very accommodative monetary policy stance. Financial market tensions in H1-12 and the slowdown in the global economy led the ECB to cut interest rates in July 2012 to a new historical low of 0.75%. This level remains in place as of this writing, although the balance of probabilities is for further easing should downside risks to the economic outlook materialise and inflation expectations remain in check. Aside from conventional monetary policy measures, the ECB actively has also focused on the very pressing issue of financial stability, routinely providing ample liquidity at very favourable terms to the Eurozone banking sector.
The scope for capital appreciation for German short-dated government bonds should look extremely limited at this stage, not least given the ECB’s pledge to support peripheral bond markets if a formal government request is made. However, as long as doubts about the long-term survival of the Euro persist, investment strategies targeting capital preservation should ensure German government bond yields remain at low levels. Once yields trend north on a sustainable manner, the appeal for very low-risk alternatives to cash holdings might diminish as investors develop a stronger appetite for risk. This is when the tactical usage of this ETF (e.g. duration management) may come fully into play. However, this remains a very distant prospect at this juncture.
Indekskonstruksjon
The iBoxx Euro Germany 1-3 TR Index measures the performance of the market of German government bonds with a maturity between one and three years. Bonds are assigned to the index on the basis of their expected remaining life. Bonds must have a minimum residual maturity of one year and a minimum outstanding of EUR 2bn. Within the index each bond is weighted according to its amount outstanding. The index is calculated on a total return basis using daily closing prices. Prices for all bonds are provided by ten major financial institutions and are then consolidated for index calculation purposes. The index is rebalanced on a monthly basis on the last day of the month. Coupon and redemption payments are held as cash until the next rebalancing and then reinvested.
Produktkonstruksjon
db x-trackers uses synthetic replication to track the performance of the iBoxx EUR Germany 1-3 TR index. This ETF was launched in January 2010 and is domiciled in Luxembourg. The db x-trackers iBoxx Germany 1-3 ETF distributes dividends at the discretion of the Board of Directors. According to available data it has done so every year in July so far since inception. For its range of fixed income ETFs, db x-trackers uses the unfunded swap model. The ETF buys a basket of securities (ie. 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. The holdings of the substitute basket tend to have a high correlation with those of the benchmark index. In fact, it is not unusual for the substitute basket to be made up of bonds from the same issuers that the index tracks. However the fund manager does not aim to replicate the index, either in the number constituent bonds, number of issuers represented or their weighting. In principle db x-trackers sets out generic limits on the various asset classes the fund can invest in. However, these limits are not fixed and can be changed to account for market circumstances. A snapshot at the time of this writing (e.g. late March 2013) showed that the ETF’s substitute basket was made up of 12 German short-dated government bonds, compared to the reference iBoxx index basket made up of 15 constituents. According to UCITS III regulations, individual counterparty risk exposure is limited to 10% of the fund’s NAV at any point in time. According to our research, in the case of fixed income 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. We understand that db x-trackers’ policy is not to engage in securities lending, which serves to minimise counterparty risk.
Avgifter
The annual total expense ratio (TER) is 0.15%. According to our research this is average for ETFs offering exposure to specific maturity segments of the German government bond market. 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.
Alternativer
Measured in assets under management (AUM) terms, the most popular ETF providing exposure to the short-dated segment of the German government bond market is the iShares eb.rexx Government Germany 1.5-2.5 ETF. This physically replicated ETF charges a TER of 0.15% and holds assets close to EUR 1bn as of this writing.
Second in the AUM stakes as of this writing is the db x-trackers ETF, followed closely by the ETFlab Deutsche Boerse EUROGOV Germany 1-3 ETF, a physically replicated fund also charging a TER 0.15%. Further down the AUM scale, but charging a lower TER of 0.12% and tracking an index which partly straddles into money market territory, we find the swap-based Comstage’s iBoxx Euro Sovereigns Germany Capped 3m-2y TR ETF. The UBS iBoxx EUR Germany 1-3 (A) ETF, launched in January 2012, is another physical replicated alternative and charges a TER of 0.17%.
Investors looking for other alternatives to this db x-trackers fund could consider the array of ETFs tracking the performance of the short-dated segment of the AAA-rated Eurozone government bond market. However,this would mean having to compromise on country exposure, as Germany would only account for a share of the underlying indices.
