The Pfandbrief 2011 | 2012

The question of the ETF’s replication form reveals both advantages and disadvantages in
the respective structural form. Whereas “full replication” involves an actual investment in all
index components in the respective weightings, “swap-based replication” has to do with a
total-return swap on the basis of the underlying index. Full replication has the advantage of
being clearly structured and independent of any quality fluctuations of the counterparty to the
total-return swap. However, the disadvantage is that, particular with relatively non-liquid index
assets, the net asset value can deviate more significantly from the rate on the exchange. On
the other hand, the total volume of a swap-based replicated ETF is more easily scalable, since
there is no need to move any certificates but rather only adjust the swap’s nominal value.
Summary
Due to their myriad intricacies, indices in the fixed-income market generally and the coveredbond
market specifically play a subordinate role in comparison to equities markets. To begin
with, index affiliation is nearly always based on a defined size and a certain ratings classification
and generally remains in place over the entire period of maturity. This applies in particular
to covered-bond markets, which show relatively low volatility with respect to ratings. New
listings and exclusions, which often occur in equities markets, are rare. While a covered-bond
index status may be of importance for all investor groups from an informational standpoint,
these indices are directly relevant for select investor groups in connection with performance
measurement – including, in particular, asset managers and central banks, as well as specific
investor groups that do not need to take into account an externally mandated disbursement
profile. Since investment strategies in covered bonds are linked to the macro-allocation,
“off-the-rack” global indices are only second-best when compared to individually calculated
indices, which in turn can be comprised of sub-indices of global index families. The direct
application of indices in connection with ETFs continues to lead a shadow existence. Although
the range of options is extremely flexible and cost-efficient, particularly when it comes to coresatellite
strategies, they come with significant restrictions with respect to tradable sizes and
the fact that only long-only strategies can be pursued.
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