Lyxor ETF EURO STOXX 50 Daily Leverage (EUR) | LYMZ |
par
Hortense Bioy, CFA08/03/2013
Stratégie d’investissement
The Lyxor ETF EURO STOXX 50 Daily Leverage can provide leverage to investors who are extremely bullish on the very near-term prospects of the eurozone equity market. This fund tracks the EURO STOXX 50 Daily Leverage Net Return index, which provides daily exposure equal to double the return of the EURO STOXX 50 Net Return index. So, if the index goes up 1% during a given trading day, the fund will go up 2%, and vice versa.
Investors should understand the risks involved in this leveraged fund, especially the effects of daily compounding and volatility on its returns. Because of the daily rebalancing and the compounding arithmetic, investors are not guaranteed to get double the index's return for any holding period longer than one day. This issue is generally amplified in periods of high market volatility and can lead to greater losses than anticipated (this volatility drag is sometimes called beta slippage).
This fund can be used as an alternative to taking out a margin loan to achieve leveraged exposure to the EURO STOXX 50. One drawback of investing on margin is that the leverage of a position will increase if the investments go down in value, which makes it easier for a double leveraged investment on margin to be wiped out by a series of large losses. Symmetrically, the leverage of a position will decrease if the investments go up in value, which can make investors wonder why their returns are less than double the EURO STOXX 50’s returns after a series of gains. Because this fund tries to match the return of the benchmark on a daily basis by rebalancing the position, the leverage remains the same over time. So this fund may yield returns closer to twice the index return from period to period than a margin account that ignores rebalancing. Another drawback of buying on margin is margin requirements, e.g. investors must post collateral, whereas this fund requires no collateral and does not impact the rest of the portfolio. So, investors can never lose more than their original principal whereas equivalent margin positions expose the investor to theoretically unlimited losses. Thus the Lyxor ETF EURO STOXX 50 Daily Leverage provides a little extra safety versus investing on margin in the face of potential large losses.
Analyse fondamentale
European stock valuations in 2012 were mainly driven by the twists and turns of the Eurozone debt crisis, with fundamentals taking a back seat. As such, it proved a highly volatile, but ultimately good year.
After various failed attempts by the region’s politicians to tackle the debt situation, the European Central Bank (ECB) finally stepped up to the plate in summer 2012 with President Draghi making an unequivocal pledge “to do whatever it takes” to preserve the euro. This resulted in stocks rising and risk premia decreasing. The EURO STOXX 50 NR index gained about 18% in 2012, following a loss of 14% in 2011. However, the index is still about 28% below its pre-crisis highs.
Though the prevailing sentiment is that there is a strong political will to ensure the survival of the Euro project, there remain fundamental economic problems to address. In particular, pending long-term solvency issues within the Eurozone periphery continue to threaten to infiltrate to the core, and growth in previously better performing countries like Germany and France is slowing.
The Euro area economic activity steadily deteriorated through 2012, ending the year with a fall in GDP of 0.6% y/y. The outlook for the region’s economy remains subdued, with the ECB predicting a 0.3% contraction in 2013. While a gradual improvement of the world economy is likely to support European exports despite the recent appreciation of the euro, domestic demand is bound to remain very weak as fiscal austerity measures and rising unemployment take their toll on household consumption.
Meanwhile, political risks will continue to play an important role in investor sentiment in 2013, as evidenced by February’s inconclusive election in Italy. The political gridlock has reignited fears the Euro area’s debt crisis may resurface. Spain’s political situation is also closely watched as accusations of corruption are putting fresh pressure on the government amid an increasing sense of weariness over the slow pace of the economic recovery in the country. Finally, there are federal elections in Germany due to be held in the autumn.
Despite the series of policy actions taken by the ECB to help stabilise the financial system since the start of the crisis, banks --EURO STOXX 50’s top sector-- remain under pressure against a backdrop of fragile mid- to long-term funding conditions, generally difficult operating conditions, and increased regulatory burdens. Deleveraging remains a longer-term structural theme for the banking sector.
Meanwhile, despite the rally since late 2012, some investors continue to see European stocks as attractively valued. Underpinning this view is the belief that much of the bad economic and political news in the region is already reflected in stock prices. They are also confident that most of the companies making up the EURO STOXX 50 will continue to benefit from the global recovery, and more particularly from the ongoing demand from emerging markets.
Construction de l’indice
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 banking sector is the biggest sector represented, comprising 13-15% of the index's value, followed by industrial goods & services (11%) and chemicals (9-10%). French and German companies account for more than two thirds of the index. Spanish and Italian companies represent another 20-23% and the remainder is spread amongst another eight countries. The index is fairly well-balanced from a single stock perspective. Sanofi is the largest component of the EURO STOXX 50 with a 4-6% weighting. The second and third largest stocks represented are Total and Siemens.
Construction du fonds
The Lyxor ETF EURO STOXX 50 Daily Leverage seeks to provide daily exposure to the EURO STOXX 50 Daily Leverage Net Return Index. So, if the EURO STOXX 50 index goes up 1% during a given trading day, the fund will go up 2%, and vice versa. However investors are not guaranteed to get double the index's return for any holding period longer than one day, because of the daily rebalancing and the compounding arithmetic. Imagine that the EURO STOXX 50 gains 5% one day, then loses 5% the next, and repeats this for 10 trading days. At the end of two weeks, it will be trading at 99% of its initial value. However this fund, which would have had daily movements of 10%, would finish the period at 95% of its initial value. The Lyxor ETF EURO STOXX 50 Daily Leverage will provide returns approximating double the return on the EURO STOXX 50 over lengthy periods only if the index trends consistently upwards or downwards (i.e. exhibits lower volatility during a given holding period). Borrowing costs (at the EONIA rate) will further affect the performance of the EURO STOXX 50 Leverage index especially over periods longer than one day. To achieve this performance, the fund buys a basket of securities and enters an un-funded swap with parent company Societe Generale. Under this agreement, the bank gives away the performance of the index in exchange for the performance of the fund’s holdings. In line with UCITS requirements, counterparty risk exposure mustn’t exceed 10% of the fund’s net asset value. This means that the ETF's holdings must represent at least 90% of the fund’s net asset value at the end of any given day. However, Lyxor has a daily target of zero swap exposure. Swaps are reset whenever their value becomes positive. Swaps may also have a negative value, which would be in essence identical to over-collateralisation of the fund. As of this writing, the ETF holds a very large majority of European blue chip equities and 5% of Japanese stocks. Additionally, the ETF holds a fund that invests in a repo fully collateralised with European equities. The repo agreement helps to partially offset the value of the swap, thus reducing counterparty risk exposure. This fund accounts for about 7% of the ETF's value. As we write, the ETF has a negative swap exposure of -0.84% to Societe Generale. Lyxor’s risk department monitors the fund’s holdings and swap exposure on a daily basis. ETF holdings are held in segregated accounts at Lyxor’s custodian, Société Générale Security Services. No securities lending is implemented within this fund, which limits counterparty risk at the fund's level. This ETF distributes dividends.
Frais
The fund levies a total expense ratio of 0.40%, which is at the top-end of the range for leveraged EURO STOXX 50 ETFs. Other costs potentially born by investors but not included in the TER include swap fees, bid-ask spreads and brokerage fees.
Alternatives
The Lyxor ETF EURO STOXX 50 Daily Leverage is currently the largest leveraged fund tracking the EURO STOXX as measured by assets under management. It is also one of the most widely-traded on Euronext Paris as measured by the 3-month average daily trading volume.
ComStage, Amundi and db X-trackers offer alternatives to this fund. All three charge lower TERs (from 0.30% to 0.35%), but these fees may potentially come at the expense of lower liquidity. Also, as these leveraged funds are only appropriate for very 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 bps. Higher liquidity may allow ETF trades to be executed at tighter bid-ask spreads.
Alternatively, there is the Boost EURO STOXX 50® 3x Leverage Daily ETP, which provides 3 times the daily perfomance of the index for a TER of 0.80%.
Those looking for leveraged exposure over periods longer than a day could also consider a margin account or the use of call options. However, they should be aware that any use of leverage will increase their risk exposure and can lead to greater losses.
