db x-trackers Euro Stoxx 50® UCITS ETF 1D (EUR) | DBXE |
par
Hortense Bioy, CFA08/03/2013
Stratégie d’investissement
The db x-trackers EURO STOXX 50 ETF 1D 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
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 db x-trackers EURO STOXX 50 ETF 1D 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 resets can be daily. Resetting swaps to zero eliminates (temporarily) counterparty exposure. Swap exposure could also be negative, meaning the fund owes the bank money. 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). The fund doesn’t engage in securities lending, which limits counterparty risk. The db x-trackers EURO STOXX 50 ETF 1D distributes dividends to fund holders once a year, in July.
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
The EURO STOXX 50 is the most widely-used regional index in Europe, so there are plenty of alternatives available from multiple providers, including iShares, Amundi, Credit Suisse, HSBC, ComStage, Source, UBS, ETFLab and Accion. However, the cheapest option (strictly in terms of TER) is offered by db X-trackers.
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 effect. It charges an expense ratio of 0.30%.
Other comparable alternatives include funds tracking the MSCI EMU Large Cap offered by Credit Suisse, ETFLab and ComStage. These funds’ expense rations range from 0.25% to 0.54%.
Other options, albeit less directly comparable, include ETFs tracking broader European large cap indices such as the MSCI Europe and the STOXX Europe 600. These indices provide a broader exposure to the European equity market. Again here, there is no shortage of options. All the major providers from iShares to HSBC offer funds that track the MSCI Europe at expense ratios ranging from 0.25% to 0.35%. There is also an iShares STOXX Europe 600 with a TER of 0.21%. The fund listed on Xetra has by far the most on-exchange volume of any of the ETFs tracking the STOXX Europe 600.
