db x-trackers Euro Stoxx 50® UCITS ETF 1C (EUR) | DXET |
par
Hortense Bioy, CFA01/04/2013
Stratégie d’investissement
The db x-trackers EURO STOXX 50 UCITS ETF 1C is a suitable choice as a core portfolio building block. It offers broad exposure to many of the largest companies in the European Economic and Monetary Union (EMU). The ETF can also be used as a tactical tool to overweight a portfolio's exposure to the currency bloc's equities, or it can be shorted to bet against the performance of the underlying equities or to hedge existing positions.
The immense size of the companies in the index (their average market capitalisation is greater than EUR 30 billion) means that even with only 50 components, it captures nearly 60% of the total market value of all eurozone-listed companies. The exclusion of non-eurozone companies means the index has slightly greater sector concentration compared to a broader European index like the STOXX Europe 600. Specifically, the EURO STOXX 50 has larger exposure to financials, telecoms and utilities, and less exposure to healthcare.
Investors should also be aware that French and German companies make up more than two thirds of the EURO STOXX 50 Index. So integrating this regional fund into a portfolio that has existing exposure to France and/or Germany might result in substantial overlap.
Investors outside the eurozone should be mindful of the currency risk inherent in this euro-denominated fund as the performance of the euro relative to the investor's home currency will affect their return.
Analyse fondamentale
Leveraged and inverse ETFs have attracted a lot of bad press over the past few years because of large losses experienced by investors who didn’t understand the effect of daily compounding and volatility on these funds’ long-term returns. However these funds have remained very popular as evidenced by the steady amount of assets under management and large daily trading volume.
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.
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
This ETF uses synthetic replication to track the performance of the EURO STOXX 50 net total return index. To achieve this performance, the fund buys a basket of securities and enters an un-funded swap with parent company Deutsche Bank. 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. To maintain a margin of safety, db X-trackers typically resets swaps to zero when counterparty risk exposure reaches 5% of the fund’s NAV. Swaps are also reset when there is a creation or redemption in the fund. The frequency of swap resetting can be daily. Resetting swaps to zero eliminates (temporarily) counterparty exposure. As of this writing, the ETF holds blue chip equities from OECD countries, including European (predominantly German) stocks and US stocks. The net swap exposure to Deutsche Bank is -0.57%. Fund holdings are held in a ring-fenced account at the fund’s custodian, State Street Bank Luxembourg and reviewed daily by State Street Global Advisors (SSgA). db X-trackers doesn’t engage in securities lending within the fund, which limits counterparty risk at the fund's level. The db X-trackers EURO STOXX 50 UCITS ETF 1C is a capitalising fund.
Frais
Unique among European ETFs, db X-trackers has waived the total expense ratio (TER) for this fund. Deustche Bank is able to extract revenues from this ETF through securities lending, as well as dividend tax optimisation (essentially, the index assumes the maximum withholding rate for dividends, but actual taxes tend to be less and Deustche Bank can keep some or all of the difference). Additional costs potentially borne by the ETF holders but not included in the TER include swap costs, bid-offer spreads and brokerage commissions.
Alternatives
As an alternative, income-seeking investors can turn to the db x-trackers EURO STOXX 50 UCITS ETF 1D, which distributes dividends.
The EURO STOXX 50 is the most widely-tracked index in Europe, so there are plenty of alternatives available in Europe from multiple providers, including iShares, Credit Suisse, HSBC, ComStage, Source, Lyxor, UBS, ETFLab and Accion. The cheapest option (speaking strictly in terms of TER) is offered by db X-trackers with a TER of 0.00%.
Investors interested in a more diversified exposure can look at the Ossiam ETF EURO STOXX 50 Equal Weight NR. By attributing the same weight to each of the index’s constituents, the fund seeks to avoid concentration effects. It charges an expense ratio of 0.30%.
However, in Asia, this is the only ETF that tracks the EURO STOXX 50 Index. Investors may consider ETFs that track other broad European indices, such as the MSCI Europe index, although the selection of ETFs tracking this index is somewhat limited.
