Following its announcement in September [see Lyxor to launch physical ETFs as investors shun synthetic providers], Lyxor Asset Management has confirmed plans to launch a range of physical exchange-traded funds (ETFs), reflecting investor preference for physically-backed products.
Lyxor, which is a subsidiary of French banking giant Societe Generale, plans to launch an initial line-up of four physically-replicated ETFs via the conversion of existing swap-based funds.
The Societe Generale subsidiary’s initial physical ETF offering will comprise four existing swap-based funds based on the EuroMTS Macro Weighted AAA Government Index series, which are to be converted to physical replication between 6 December and 11 December 2012.
The four funds are the Lyxor ETF EuroMTS AAA Macro-Weighted Government 1-3Y, the Lyxor ETF EuroMTS AAA Macro-Weighted Government 3-5Y, the Lyxor ETF EuroMTS AAA Macro-Weighted Government 5-7Y and the Lyxor ETF EuroMTS AAA Macro-Weighted Government Bonds.
The funds will be managed using full replication, meaning each fund will invest directly in all the sovereign bonds that make up the respective EuroMTS Macro Weighted AAA Government Index, without any sampling. According to a statement released by the company, “this will achieve the highest possible correlation between the performance of the funds and the performance of the indices.”
The statement added: “Securities lending is not part of the management process as the performance benefit to investors would be negligible, and would not justify the addition of counterparty risk to the fund.”
The EuroMTS Macro-Weighted AAA Government Bond Indices are Eurozone sovereign indices grouped by maturity, and based on issuers with the highest credit ratings (denoted “AAA”) from two out of the three main ratings agencies.
The ‘macro-weighted’ strategy is an innovative weighting methodology that uses macroeconomic indicators. Country weights are primarily based on Gross Domestic Product (GDP) and then adjusted using the following 4 indicators: debt to GDP ratio; current account (as a % of GDP); quarter-on-quarter GDP growth; long-term interest rates.
While market-cap-weighted indices calculate exposure on the countries debt level, these macro-weighted indices lead to a fundamental approach that better reflects the economic potential, and the sovereign risks of the eurozone debt market. For fixed income indices, non market-capitalisation-based indices avoid concentration on the most highly-indebted issuers. They rely on the idea that the capacity of an economy to generate new wealth in a sustainable way, as measured by its GDP and GDP growth, is a good representation of its capacity to fulfil its debt obligations.