iShares Citigroup Global Government Bond (DE) (EUR) | EUN3 |
par
Jose Garcia-Zarate01/02/2013
Stratégie d’investissement
The iShares Citigroup Global Government Bond ETF offers investors exposure to the aggregate performance of the government bond market of the countries making up the G7 (e.g. US, Japan, Germany, France, UK, Italy and Canada). These seven countries combined account for around 85% of the developed world government bond market. The broad nature of this ETF makes it suitable to work well within core investment portfolios with a high degree of international diversification. In most cases fixed income holdings provide a steady and fairly reliable revenue stream via coupon and redemption payments. Those attracted by this latter property should be advised that this USD-denominated iShares ETF distributes dividends on a semi-annual basis.
This is an ETF that covers the whole maturity spectrum of the G7 government bond market, and so it could help investors to shield the overall investment portfolio against negative performance effects arising from market shifts across the yield curve, whether near-term tactical or long-term strategic in nature. These yield curve movements will be fundamentally driven by a combination of the broad international and the local macroeconomic environments of the different issuing countries this ETF covers. Would-be investors need to be aware that in some instances these two variables may provide conflicting signals. In fact, it could be a difficult and time-consuming task for investors to accurately monitor the specifics of each economic area covered by this ETF.
As such, this ETF is perhaps best seen as a something of a “one stop shop” in that it would allow investors to meet their broad developed government bond exposure needs (e.g. income-seeking and counterweight to exposure to world developed equity markets) with a single financial instrument.
Analyse fondamentale
The global economic recovery lost steam in 2012, while forecasts for 2013 point to another year of sub-par growth with risks skewed to the downside. The recovery also remains rather uneven. Prospects for the US have improved, whereas those of Germany, and particularly the UK and Italy, have worsened on account of the Eurozone recession. When it comes to the fiscal situation, Germany and Canada stand up as an example of probity against countries with an overblown public debt; perennially high in the case of Italy and Japan, and ballooned since 2008 as a result of the publicly-funded rescue of the banking sector in the US and the UK.
However, overall financial market perceptions have improved into 2013, mainly as a result of the easing of tensions in the Eurozone sovereign debt market in H2-12. As a result, there is talk of a widespread reallocation of money flows into riskier asset classes (e.g. equities) and away from fixed income. Despite the upside to bond yields, these still remain at low levels by historical standards, no doubt aided by very accommodative monetary policy settings. However, the path of least resistance points firmly to the upside going forward.
In the US, the Federal Reserve remains committed to a very accommodative monetary policy stance, with Fed Funds to be kept at 0.00-0.25%, for as long as unemployment remains above 6.5% and inflation does not deviate by more than 0.50% from the 2.0% price stability target. In addition to conventional policy measures, the Fed continues to supplement its stimulus efforts via a large-scale programme of asset purchases. It is estimated that the Fed holds over USD 2Trn of US Treasuries, agency debt and mortgage backed securities (MBS). The latest phase of QE, which started in September 2012, will continue throughout 2013 on an enhanced basis, with the Fed buying USD 40bn of MBS and USD 45bn of long-dated US Treasuries every month. The Fed will also maintain its policy of reinvesting all principal payments from its holdings into MBS and US Treasuries at auction. All this is designed to exert downward pressure on long-term interest rates and facilitate cheap financing to economic agents.
Meanwhile in the Eurozone, sovereign debt market tensions have eased significantly since the verbal intervention of the ECB President Mario Draghi in defence of the Euro and the approval of the “outright monetary transactions” plan. As such, government bonds from countries such as Germany and France have seen yields rising, while those of Italy have fallen. However, this does not solve the dichotomy in economic performance between core and periphery countries, with the latter still struggling considerably.
Providing overall support in the background we have the everlasting “international safe-haven” status enjoyed by Japanese government bonds, courtesy of the country’s ability to self-finance its humongous public debt burden. The ultra-accommodative policy stance followed by the Bank of Japan (e.g. zero interest rate policy combined with an active – and expanding – programme of purchases of Japanese government bonds) will be further enhanced in 2013 in pursuit of a higher inflation target (e.g. 2.0% vs 1.0%).
Construction de l’indice
The Citigroup Group-of-Seven (G7) Index measures the aggregate performance of the government bond market of the countries making up the G7 group of industrialised nations, namely the US, Japan, Germany, France, the UK, Canada and Italy. The index covers around 85% of the market value of the broader Citigroup World Government Bond Index. Only bonds issued in local currency are eligible for index inclusion. Inflation-linked, variable rate bonds, JGB for individuals and STRIPS are not eligible. Issuing countries and individual bonds are statistically weighted in the index by market capitalisation, with Japan and the US taking up around 60% of the basket. The minimum outstanding for individual bonds from eligible sovereigns is set in local currency terms. All bonds must have a minimum remaining maturity of one year as of the last calendar day of the previous month. The index is calculated daily using bid prices provided by Citigroup traders, except for Japanese government bonds where mid prices are used. Prices are collected at local market close. The index is denominated in USD. Rebalancing is done on a monthly basis on the last calendar day of the month. Coupon income received during the month is held in a deposit at 1M Libor (or equivalent) and reinvested in the index at rebalancing.
Construction du fonds
iShares uses physical replication to track the performance of the Citigroup Group-of-Seven (G7) Index. This ETF was launched in March 2009 and is domiciled in Ireland. It distributes dividends on a semi-annual basis. Historical data reveals a January-July payment cycle, although exceptions may occur. Given the large number of index constituents, iShares uses statistical sampling to construct the fund. A comparative analysis has routinely revealed that the number of holdings in the ETF is not much lower than those in the benchmark index. As of writing (e.g. end January 2013), the number of bonds making up the fund was around the 625 mark vs. an estimated 650-700 constituents of the Citigroup benchmark index. As such, statistical sampling in this case should perhaps be understood as a process whereby the fund manager excludes bonds included in the index which for example may suffer from special liquidity conditions in the open market. Our understanding is that the aggregate statistical weights of both issuing countries and maturity buckets are kept broadly in check with those of the index. A snapshot as of this writing showed US Treasuries and Japan broadly at par with 30-35% each, Eurozone G7 countries with close to a combined 25%, the UK with around 6% and Canada with 2%. As per maturity exposure, the fund shows a broad 60/40 split between short-to-medium and long-dated bonds. 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 at 50% per fund. 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 60/40 between the ETF and BlackRock, respectively.
Frais
The total annual expense ratio (TER) is 0.20%. 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.
Alternatives
The main alternative in the European market to the iShares Citigroup Global Government Bond ETF is the db x-trackers Global Sovereign EUR Hedged Index ETF. This swap replicated db x-trackers ETF tracks a Deutsche Bank index that measures the performance of the majority of the developed world sovereign debt market rather than the restricted universe of G7 countries. However, the G7 countries represent close to 90% of the basket of constituents of this broader index and so their aggregate performance is bound to statistically condition its general direction. This db x-trackers ETF carries a higher TER of 0.25% and does not distribute dividends. However, it offers the potentially distinctive advantage – at least for European clients – of being hedged either in EUR, GBP or CHF.
iShares provides an alternative to its own ETF in the shape of the iShares Global Government AAA-AA Capped Bond ETF. Launched in October 2012 and carrying a TER of 0.20%, this USD-denominated ETF provides exposure to the market of government bonds from all developed economies with a minimum credit rating of AA. The combined statistical weighting of the eligible G7 countries (e.g. all except Italy) accounts for 80% of the index’s value.
