db x-trackers II EONIA UCITS ETF 1C (EUR) | DBXT |
par
Jose Garcia-Zarate07/02/2013
Stratégie d’investissement
The db x-trackers II EONIA TR ETF is a money market ETF offering investors the possibility to invest cash holdings without incurring a significant level of risk. The main objective is one of providing a bullet-proof and highly flexible vehicle to invest cash on fairly short-term horizons. The trade-off is one of returns, with money market funds in general aiming at best to marginally better prevailing money market rates. In the case of this db x-trackers ETF, the objective is that of replicating the return of a rolling deposit invested daily at EONIA (i.e. the overnight reference rate for the Euro computed as a weighted average of all overnight unsecured lending transactions undertaken in the banking system).
In our view, the db x-trackers II EONIA TR ETF could play a role as a core holding in an investment portfolio as a near-perfect substitute for outright cash positions. Some investors may also see money market funds as a vehicle to neutralise the so-called “cash drag” (e.g. the diminishing effect on overall returns of holding rather than investing cash). Investors wanting to make use of a money market ETF for cash management purposes will have to carefully consider whether the returns on offer are financially attractive relative to alternative vehicles measured against key economic variables (e.g. interest rates, inflation).
The appeal of this ETF as a cash management instrument is enhanced by its daily real-time tradability, generally at lower costs than traditional money market funds. This could make this ETF a useful tool for institutional investors with an active need to financially optimise the use of cash holdings. Meanwhile, for retail investors, a key appeal of this ETF is likely to be as an alternative to bank deposits. In general, retail investors are likely to consider money market ETFs on longer-time horizons than institutional investors.
Analyse fondamentale
The Eurozone’s economic performance progressively deteriorated through 2012, with falls in output recorded from Q2 to year-end. Expectations for 2013 are for a fairly modest performance – clearly below that of the US and emerging markets – as Eurozone economies remain committed to austerity policies. Although the slowdown is general to all Eurozone national economies, there remains a clear performance gap between the export-oriented Northern economies and the private-demand-dependant Periphery, with the latter espousing high unemployment rates. And yet, despite not a particularly bright general outlook, the fact is that perceptions about the Euro have changed for the better since the European Central Bank (ECB) verbalised an unequivocal commitment to ensuring its survival.
The Eurozone has experienced a distinct lack of inflationary pressures since the start of the economic crisis. This has allowed the ECB to keep a very accommodative policy stance, with interest rates at historical low levels since May 2009 to date, bar a short-lived period in 2011. The deterioration of economic conditions in 2012 – not to mention the damaging effects of the Eurozone sovereign debt crisis – led the ECB to bring rates further down in July 2012, with the refi rate cut to 0.75% and the deposit rate to 0.00%. These levels remain in place as of this writing. Expectations are for very loose monetary settings to remain in place for the foreseeable future, not least as inflation expectations remain in check with the ECB’s price stability target of an HICP rate of around 2.0% y/y.
Relevant money market rates have broadly tracked the movements in ECB interest rates. EONIA went down from an average of close to 3.9% in 2008 to 0.71% in 2009 and further down to 0.44% in 2010. It picked up to 0.87% in 2011 to reflect the effects of the ECB’s short-lived tightening cycle. However, EONIA resumed a clear downward trend into 2012, finishing the year at an average of 0.23%.
Aside from conventional monetary policy measures, the ECB remains focused on the issue of financial stability by routinely providing ample liquidity at very favourable terms to the Eurozone banking sector. The impairment of interbank lending channels since the start of the crisis has had a direct effect on EONIA. Before the crisis, EONIA used to track the ECB’s main refi rate. However, with interbank lending frozen, commercial banks have been parking their cash en masse with the ECB. As a result, EONIA now tracks the much lower ECB deposit rate, currently at 0.00%, with obvious consequences on the performance of any EONIA-tracking financial instrument.
The lowering of the ECB deposit rate to 0.00% was seen as move from to kick-start the interbank lending market. Meanwhile, the improvement of perceptions vis-à-vis the Euro has also produced some positive developments (e.g. commercial banks becoming less reliant on ECB funding). However, full resumption of normal lending practices still remains a somewhat distant prospect. As such, EONIA is likely to continue tracking the ECB’s deposit rate for the foreseeable future.
Construction de l’indice
The Deustche Bank EONIA Total Return Index is calculated and disseminated on a daily basis by Deustche Bank. It aims to reflect the performance of Eurozone money markets by measuring the return of a rolling deposit invested daily at EONIA (i.e. the overnight reference rate for the Euro computed as a weighted average of all overnight unsecured lending transactions undertaken in the banking system). The deposit is compounded daily on a 360 day year convention. The EONIA rate used is based on the European close rate as published in Reuters. The Deutsche Bank EONIA index has an inception date of 31-Dec-1998 with a level of 100. EONIA is sponsored by the European Banking Federation (EBF), which represents the interest of some 5000 European banks, and by the Financial Markets Association (ACI). EONIA is computed with the help of the European Central Bank (ECB). The banks contributing to EONIA are the banks with the highest volume in the Eurozone money markets. The panel of banks contributing to EONIA currently consists of 49 banks. Since its launch in January 1999, EONIA has become the underlying rate of numerous financial derivatives.
Construction du fonds
db x-trackers uses synthetic replication to track the Deutsche Bank EONIA Index. The 1C (e.g. capitalising) ETF was launched in May 2007 and is domiciled in Luxembourg. The 1D (e.g. distributing) came along in March 2008, while the 2C (e.g. capitalising) followed in October 2008. We understand that for its money market ETFs, db x-trackers will tend to put together a fund basket primarily made up of Eurozone government bonds. This can be complemented with cash deposits and government-backed stock from non-EU issuers (e.g. US Treasuries). In principle db x-trackers sets out generic limits on the various asset classes the fund can invest in. However, these limits are not fixed and can be changed to account for market circumstances. Once the basket of securities is in place, db x-trackers will enter into an OTC total return swap with Deutsche Bank whereby it exchanges the performance of the aforementioned basket of assets for the performance of the Deutsche Bank EONIA Index. According to UCITS III regulations, individual counterparty risk exposure is limited to 10% of the fund’s NAV at any point in time. In essence, as db x-trackers is a subsidiary of Deutsche Bank, counterparty risk arising from swap transactions ultimately remains within the same financial group. According to our research, in the case of fixed income ETFs, db x-trackers has a generic policy of re-setting swaps to zero when counterparty exposure reaches 5% of NAV and/or whenever there is creation or redemption of units. The frequency of swap resetting can be daily. We understand that db x-trackers’ policy is not to engage in securities lending. The db x-trackers II EONIA TRI ETF is an umbrella vehicle encompassing four different classes (e.g. 1C, 1D, 2C, 3C and Maxblue) defined by a) share class making up the fund and, b) whether or not there is dividend distribution. The 1C, 2C and 3C share classes are capitalising, while the 1D distributes dividends. As we write (e.g. early February 2013) the 1C ETF was by far the most popular, taking up 75% of total assets under management (AUM).
Frais
The annual total expense ratio (TER) for this ETF (note – we exclude the Maxiblue category) is 0.15%. This seems to be the top-end of the 0.10-0.15% TER range for Eurozone money market ETFs. 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
As we write, measured in AUM terms, the db x-trackers II EONIA TRI ETF is market leader in the segment of Eurozone money market ETFs. Second on the AUM scale, and also tracking an index replicating the performance of a daily rolling deposit invested at EONIA, we find the Lyxor Euro Cash ETF. This swap-based fund also charges a TER of 0.15%. Other alternatives providing similar exposure to the Eurozone money market, but lagging substantially in AUM terms, are Comstage EONIA ETF (TER 0.10%), Amundi EONIA ETF (TER 0.14%) and Credit Suisse EONIA ETF (TER 0.14%).
The PIMCO Source Euro Enhanced Short Maturity Source ETF is an actively managed ETF aimed at outperforming EONIA by investing in a higher-yielding mix of corporate and government bonds with short maturity. The price for active management comes in the shape of a TER of 0.35%.
Investors looking for alternative ways of measuring the performance of the Eurozone money market may consider the iShares eb.rexx Germany Money Market ETF (TER 0.12%). This physically-replicated fund tracks an index measuring the performance of German government bonds with very short residual maturity. Following the same strategy, we find ETFlab’s Deutsche Boerse EUROGOV Germany Money Market ETF (TER 0.12%). Meanwhile, the Amundi Cash 3M EuroMTS Investment Grade (synthetic; TER 0.14%) and the PowerShares EuroMTS Cash 3M ETF (physical; TER 0.15%) track an index that measures the performance of the broad Eurozone government T-bill market.
