db x-trackers II Emerging Markets Liquid Eurobond UCITS ETF 1C (EUR) | DXSU |
par
Lee Davidson25/03/2013
Stratégie d’investissement
The db x-trackers II EM Liquid EuroBond Index ETF offers investors exposure to emerging markets (EM) non-local currency denominated sovereign debt across a broad range of maturities, though with a longer-dated bias (e.g. duration around 6.6 years). Although in recent years, local-currency denominated EM debt has received increased investor attention due to the potent return combination of high yield and currency gains; historically EM debt has been denominated in USD or other developed nation currencies to make the investments more palatable to global investors. This particular ETF tracks an index whose currency exposure is predominantly USD (80-90%). However, the fund’s returns are hedged in EUR, which may be seen as an advantage for some investors, particularly Eurozone-based. This means that investors should be mindful of USD-EUR fluctuations and pay special attention to factors (e.g. US Fed and ECB policy) that drive them.
Conventional wisdom suggests that emerging markets are more likely to default than their developed neighbors, and while this assertion is coming under increasing scrutiny, the general premise still holds. Investors in EM debt are compensated for this increased risk with higher yields and greater diversification away from more mainstream fixed income investments. Specifically, at the time of this writing, this ETF boasts a 4.0% yield-to-maturity compared to 1.4% for Barclays US Aggregate Bond Index. Another commonly cited advantage to investing in EM debt is its observed low correlation to traditional fixed income investments. While this ETF does not have a long enough track record to make a direct comparison, its benchmark (JP Morgan EMBI index) has exhibited trailing 10-year correlations of -28% and 68% to the BarCap US Treasury TR and Citi G7 indices, respectively. In fact, EM debt, in general, tends to be more highly correlated with movements in the equity markets as measured by the MSCI World (~63%) and STOXX Europe 600 (~63%) indices than investment grade debt.
Investors eager to gain exposure to the EM sovereign debt market should likely treat this ETF as satellite holding given its relative riskiness and niche status. Though, investors could also consider it an alternative to existing non-investment grade debt holdings.
Analyse fondamentale
In the past two decades, EM economies have been one of the financial market's most successful stories. Significant structural changes in how EM countries are governed have been implemented and have been designed to boost capital inflows, which has led to a shift in investors' asset allocation trends. For most investors, EM exposure has become somewhat ubiquitous, as many are seeking access to the promised uncorrelated, higher returns. Post-crisis, unlike their developed cousins, investor interest in EM sovereign debt piqued due to EM's firmer fiscal footing. This is underpinned on sizeable current account surpluses which, for example, allowed EM to implement comprehensive stimulus packages during the worst of the global downturn with little impact on public debt levels.
Today, however, the export-driven model that recently preserved the fortunes of EM economies may well be what is holding back future growth. Thus far, the success of emerging markets has been predicated on an export-driven model where they assume the role of preferred supplier to the consumer-driven developed nations. This model tends to breakdown when demand from developed economies wanes and EM are left holding massive amounts of unclaimed inventory. With most developed nations heavily embroiled in a debt crisis, the demand for exports from EM has fallen sharply. Furthermore, the overwhelming debt levels in developed economies, coupled with a perception of reduced risk in EM, has caused bond and CDS spreads to tighten between EM and developed nations. Finally, EM local currencies have felt upward pressure as their currency begins to appear stronger in comparison to the developed world. While the improved relative credit worthiness and strength of currency for EM can be considered a success, this success undermines the export-driven model that EM economies have so staunchly adhered to thus far. Perhaps, nothing reveals EM's political commitment to the export-driven model more than their massive accumulation of foreign reserves in attempt to artificially keep local currencies competitive.
With the macro dynamics present today, long-term investment risks relate to EM nations' possible need to shift gears from export-fueled growth towards one driven by domestic consumer discretionary spending. Doing so could require lengthy overhauls of the existing government architecture possibly in the form of entitlement programs, like health care. While many EM may prefer to ride out the storm than undertake such drastic measures, the pressure on EM may mount to a point that they have no choice. In such a scenario, EM government debt issuances would likely rise, in turn take some of the appeal away from an emerging market debt investment.
Irrespective of the EUR hedge, the index holdings this ETF tracks are almost entirely denominated in USD and so investors will be primarily exposed to interest rate policy as determined by the US Fed. In July, the US Fed maintained its guidance that interest rates will remain near current low levels until mid-2015.
Construction de l’indice
The Deutsche Bank Emerging Markets Liquid Eurobond Euro Hedged Index is produced and disseminated by Deutsche Bank, the parent company of db x-trackers. The purpose of the index is to reflect the composite total return performance of emerging market sovereign and quasi-sovereign debt instruments. The index is hedged in EUR on a monthly basis based on the value of EUR-USD at the end of each month. The total number of issuers included in the index shall not exceed 15 sovereigns from globally-recognised emerging market nations. Only bonds with maturities between 5 years and 30 years can be considered for inclusion, but the index aims to select bonds with maturities closest to 9 years. The bonds must be payable in EUR, GBP, CAD, USD or JPY. In determining index constituents, Deutsche Bank looks at macroeconomic and liquidity factors from the emerging market countries, as well as liquidity, credit rating and maturity of the bonds. Based on the above criteria, DB scores each bond using an in-house methodology to assign constituent weights in order to achieve an index that takes economic reality into account. At the time of this writing, the index’s largest country exposure is to Turkey (9.9%), followed by Russia (8.9%), Brazil (8.6%), and Poland (8.9%). The index’s constituent securities are primarily denominated and pay interest in USD (88%) with the remainder denominated in EUR.
Construction du fonds
db x-trackers employs synthetic replication to track the Deutsche Bank EM Eurobond Euro Hedged index. For its fixed income ETFs, db X-trackers will tend to put together a fund basket primarily made up of Eurozone government bonds. At this time, however, the substitute basket for this fund is composed of government bonds (97%), government guaranteed (2%), and covered bonds (1%). 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 a total return swap with Deutsche Bank whereby it exchanges the performance of the aforementioned basket of assets for that of the 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. At this time, it is db x-trackers' policy to not engage in securities lending and thereby limiting counterparty risk associated with this activity. The fund was launched in May 2008, is domiciled in Luxembourg, and its base currency is EUR.
Frais
db x-trackers charges a total expense ratio (TER) of 0.55% for this ETF, which falls in line with other funds in this category.
Alternatives
The most direct comparable ETF to db x-trackers in terms of duration and exposure is the physically replicated iShares JPMorgan $ Emerging Markets Bond ETF, which tracks the JPMorgan EMBI index. The iShares ETF is far and away the most popular ETF tracking EM debt, in terms of total assets under management, and is also the most actively traded. The iShares ETF charges a TER equal to 0.45%. Unlike db X-trackers, the iShares ETF is not EUR hedged.
Further down the liquidity and size spectrum, the Amundi ETF Global Emerging Bond Markit iBoxx product gives investors exposure to emerging market sovereign debt through swap-based replication. Amundi charges TER equal to 0.30% and tends to have a slightly longer duration than db X-trackers. Similar to db X-trackers, Amundi's product is denominated in USD.
Investors interested in local currency denominated EM sovereign debt can consider the SPDR Barclays Cap EM Local Bd ETF, Source PIMCO EM Advantage Local Bond ETF, or the iShares Barclays Capital Emerging Market Local Govt Bond ETF. In terms of fees and expense, SPDR charges a TER equal to 0.55%, Source charges 0.60% and iShares 0.50%.
