db x-trackers FTSE 100 UCITS ETF 1D (EUR) | DBXX |
par
Hortense Bioy, CFA10/03/2013
Stratégie d’investissement
The db x-trackers FTSE 100 ETF provides broad exposure to large capitalisation UK equities and can be used as a core holding. Investing in this well-diversified fund could appeal to those looking to build a UK-centric portfolio. However, it is important for investors to examine the fund’s holdings. With a 20% weighting, financials is the top sector represented in the fund. Overall, almost a third of this ETF is invested in shares of resources companies such as Royal Dutch Shell and Rio Tinto, whose share price is primarily driven by international commodity prices. Also, it should be noted that the FTSE 100 is closely correlated to international equity indices as many of the index’s constituents are truly global players (more than 70% of the revenues of FTSE 100 companies come from outside the UK, while most of the top ten FTSE 100 companies report their results in US dollars rather than sterling). Over the past five years, the FTSE 100 has shown a 90% correlation to both the EURO STOXX 50 and the MSCI World. This fund can also serve as a tactical tool for those looking to place a bet on the near-to-medium-term prospects of the UK equity market under the belief that the benchmark is undervalued. However, investors outside of the UK should be wary of currency risk.
Analyse fondamentale
Over the past couple of years, valuations in the UK equity market have been affected to a large extent by the twists and turns of the seemingly endless Eurozone sovereign debt crisis. While the ECB’s pledge “to do whatever it takes” to preserve the euro has given some respite to the market, concerns about the Eurozone macro situation and the country’s own domestic problems continue to weigh on the British economy.
The UK economy contracted 0.3% q/q in Q4-12 after facing its second recession since the start of the financial crisis during the first half of the year. Fears of a longer slump have risen as companies hold back investment and domestic demand is undermined by a mix of unfavourable labour market conditions and public spending cuts. The UK government remains determined to eliminate the country’s structural deficit by 2017, despite increasing pressure to change course after the recent loss of the country's prized 'AAA' credit rating by Moody’s.
The resulting weakening of the pound --which has been steadily depreciating against the euro since mid-2012 and against the dollar since January-- is beneficial for UK exporters, especially so for those FTSE 100 companies that derive most of their revenues from abroad. A weak pound, however, is less good news in the medium term for UK consumers as they risk to be hit by an increase in imported inflation. In fact, the country has been struggling with sticky inflation above the Bank of England’s price stability target of 2% for some years now.
Against this backdrop, the Bank of England (BoE) is expected to maintain its accommodative stance. In fact, with the arrival of new governor Mark Carney in the summer, expectations are that the BoE will pursue a more aggressively loose policy line, which might support stock valuations. The risk, of course, is for much higher inflation via increased pound depreciation. More quantitative easing is also on the cards despite mounting doubts about its effectiveness on the economy.
Looking at current valuations, FTSE 100 companies appear fairly priced. As of this writing (early March 2013), the FTSE 100 index trades at about 13.4 times earnings, a multiple that is in line with its long-term average P/E ratio of 13-15. The FTSE 100 recently hit a fresh five-year high, buoyed by reassuring services data, good corporate profits, hopes of more central bank stimulus, and China’s vow to maintain its growth target.
Meanwhile, despite their rally since mid-2012, UK banks including HSBC, Barclays, RBS, and Lloyds remain an area of uncertainty. While they have made significant progress in boosting their capital positions, they continue to face a challenging market environment with generally difficult operating conditions and increased regulatory burdens, with still the risk of being broken up if they fail to reform. Deleveraging remains a longer-term structural theme for the banking sector.
Construction de l’indice
The FTSE 100 Index is a free float market capitalisation weighted index that offers exposure to the 100 largest UK stocks. It represents about 85% of the market capitalisation of the London Stock Exchange and 7.8% of the world’s equity market capitalisation (based on the FTSE All-World Index as of 28 May 2010). The constituents of the index are determined quarterly. The index consists of 100 companies, for a total of 102 listings as two share classes are included for Royal Dutch Shell and Schroeders. The index’s top sector exposures include financials (19-21%), oil & gas (17-19%), consumer goods (14-16%) and basic materials (11-12%). The index looks fairly well-balanced from a stock perspective. HSBC is the largest component of the FTSE 100 with a 7-8% weighting. The next largest stocks represented are Vodafone, BP and Shell, with a 5-6% weighting each.
Construction du fonds
db X-trackers FTSE 100 uses synthetic replication to track the performance of the FTSE 100 total return index. To achieve this return, the fund invests in a fully-funded swap with its parent company Deutsche Bank. Under this swap agreement, the proceeds of fund holders’ investment in the ETF are transferred to the swap counterparty in exchange for the performance of the index. To mitigate counterparty risk, db X-trackers requests that Deutsche Bank post collateral in a segregated account with the custodian State Street Bank Luxembourg in Deutsche Bank’s name of and pledged in favour of the fund. Should Deutsche Bank default, the ETF may be terminated and assets of the ETF liquidated without giving prior notice to the bank. As of writing, the collateral comprises a large majority of OECD country equities and various other types of securities including government bonds. The company applies haircuts to the collateral’s market value (7.5%-20% for equities, 10% for corporate bonds, 0% for government bonds), which results in overcollateralisation of the fund. Collateral is reviewed daily by third party State Street Global Advisors (SSgA). At the time of writing, the collateral value is equivalent to 108.8% of the fund's NAV. The fund doesn't engage in securities lending, which limits counterparty risk at the fund’s level. Dividends are distributed to fund holders once a year, usually in July.
Frais
The fund has a total expense ratio of 0.30%, which is at the low-end of the range for ETFs tracking the FTSE 100. Additional costs potentially borne by the ETF holders but not included in the TER include swap spread, bid-offer spread and brokerage commissions when buy and sell orders are placed for ETF shares.
Alternatives
There is no scarcity of alternatives for investors looking for exposure to UK large cap equities. Providers including iShares, Lyxor, Source, HSBC, ComStage, Amundi, Credit Suisse and UBS offer their own FTSE 100 ETFs or MSCI UK ETFs at TERs ranging from 0.25% to 0.50%. The Vanguard FTSE 100 ETF charges a lower TER of 0.10%. The iShares FTSE 100 remains the most popular and heavily-traded fund tracking the FTSE 100 on the LSE.
Another alternative includes Ossiam’s FTSE 100 minimum variance ETF, which offers exposure to a lower volatility version of the FTSE 100. This physically-replicated fund carries a TER of 0.45%. Investors seeking exposure to medium-sized UK stocks can take a look at ETFs tracking the FTSE 250 index, which is comprised of the 101st to 350th largest UK companies. Although the FTSE 250 has higher concentrations in financials (31-36%) and industrials (20-23%) than the FTSE 100, it is a more diversified index from the perspective of individual names, with its top 10 holdings representing only 10% of the index’s value. The largest and most heavily-traded ETF tracking the FTSE 250 is offered by iShares with a TER of 0.40%. Amundi launched a cheaper ETF (speaking strictly in terms of TER) at 0.25%.
Those looking for exposure to the broad UK market in one fund can consider ETFs that track the well-known FTSE All-Share index. It represents at least 98% of the UK market capitalisation and is the aggregation of FTSE 100, FTSE 250 and FTSE Small Cap Indices. The largest fund db x-trackers FTSE All-Share has a TER of 0.40%.
