The Pfandbrief 2011 | 2012

Pfandbriefe in Securities Indices – Current Trends and Applications
OVERVIEW OF COVERED-BOND ETFs
Investment spectrum Name Bloomberg Currency AuM Replication
Germany ISHARES EBREXX JUM PFANDB DE R1JKEX GT EUR 1178 Full*
Germany COMSTAGE ETF IBOXX GERMANY C540 GT EUR 10 Swap**
Germany DB X-TR II IBOXX GERM CV TR XBCT GT EUR 255 Swap
Europe LYXOR ETF EUROMTS CBA ECB FP EUR 119 Swap
Eurozone ISHARES MARKIT IBOXX EU CV B ICOV LN EUR 136 Full
Eurozone ISHARES MARKIT IBOXX EU CV B SCOV LN GBP 121 Full
* Full Replication means actual 1:1 investment in all index components
** Swap-Based Replication is accomplished through the aid of a total-return swap at the fund level
Sources: Bloomberg, UniCredit Research
Particularly Interesting for Smaller Institutional and Large Private Investors
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Although covered-bond ETFs play a subordinated role in comparison to total market volume,
they nevertheless constitute an attractive investment option, particularly for small institutional
investors and larger private investors. Currently, investors are split roughly into 80% institutional
investors, including, in particular, non-financials, and 20% retail customers. There are
two reasons why smaller insurance companies to date have not invested more heavily in fixedincome
ETFs generally and covered-bond ETF specifically: the fact that these segments in
particular have been seen as forming part of their core expertise, meaning that the preference
has been for direct investment or tightly structured special funds; in addition, the lot sizes that
even smaller insurance companies trade are too extensive as to be able to be depicted in connection
with ETFs.
However, for investors with lot sizes of up to EUR 1 million per order, country-specific
ETFs in particular represent an excellent basis for core-satellite strategies, i.e. the allocation
of a total investment into a highly diversified core investment (“Core”) that should offer a basic
yield with adequate security, and several individual investments (“Satellites”) that reflect the
investor’s specific view of the market. For this reason, country-specific ETFs are particularly
well suited, since they allow a certain pre-selection. This is necessary, because in spite of a
number of efforts – above all, in 2006 – a functioning CDS market for covered bonds never
emerged. Accordingly, even within a core-satellite approach, only a long-only strategy is possible.
Even though it is possible to calculate a hedge ratio of covered bond to senior CDS that is
fair under ratings models, the basic risk and the hedge would have to be continually adjusted.
At the same time, however, using the specific example of the aforementioned covered-bond
ETF, a practicable strategy can be described with a core of Pfandbriefe. Due to shrinking volume
outstanding, a direct investment of small lot sizes in the Pfandbrief market is likely to be
accompanied by less favourable pricing terms. For this reason, a core strategy using ETFs is
highly advisable, particularly for smaller lot sizes. Investments in specific names within the
Pfandbrief segment that go beyond the index weight, or investments in a European context,
would then be characterised as a satellite investment.