The main objective of the Lyxor CNB (Euro Corporate Bond) tracker is to replicate the performance of the benchmark Markit iBoxx Euro Liquid Corporate Non-Financials which consists of 20 euro-denominated corporate bonds issued by diversified multinational issuers and very good quality of signature (all bonds have an average credit rating higher than BBB-).
This is a capitalization index so the yield distributed periodically by the components are reinvested. The costs related to this ETF are rather low, at 0.2%.
The companies that issue these bonds are multinationals mostly of European origin (28% from Netherlands, 20% from Germany 8% from France), while 27% are from the United States. Among the top 10 issuers are US General ELectric, Verizon, Johnson & Johnson and many major German groups such as Vodafone, BMW, Deutsche Telekom.
The quality of signatures is high with 19% of companies rated AAA or AA, 25% in A and 55% in BBB. The average bond maturity is around 7 years with a coupon rate of 1.47%.
We consider this ETF to be an interesting vehicle in a context of rates close to 0% in developed countries with significant defensive characteristics given the quality of signatures and the diversification of 20 global issuers. It is an ideal vehicle for positioning itself during periods of uncertainty or volatility in high-yield or equity markets, with low but not zero return. Of course, the policy of the ECB is important; it is currently being extending the bond buying program (EQ) until the end of 2017 and, on the other hand, reducing the amount of purchases ("Tapering" in the jargon) to € 60bn Per month instead of 80md €. However, improved growth and the expected reflation of the economy already have an upward impact on interest rates, which should lead the ECB to standardize for 2018, ie a halt in bonds redemption, two years after the United States.
However, rates should remain low enough for many months as there are no signs of inflation at this stage and the political cycle is not yet over with the German elections scheduled for next September and Italian elections, much more risky, in 2018. In the long term, we believe that the rise in interest rates is inevitable, but should ultimately be very gradual and limited because the highly indebted developed states cannot afford a sharp increase in rates that would cause the sovereign debt level to be out of control. The maturity of the bonds that make up this index is less than 5 years for 30%, 33% between 5 and 7 years and only 37% for more than 7 years, so in case of progressive rate increases the new bonds should naturally increase the return.
Moreover, in the event of high volatility in the markets, this ETF seems to offer an excellent risk /reward, as last week's example (+ 0.35% versus -2.6% for the stoxx600) is a perfect example.
