Very few ETF investors have profited from the continuing widening in credit spreads, even thought the vehicles are there for them to do so.
In Marco Montanari’s interview with Index Universe last week, he pointed out the predominance of investors in db x-trackers’ long credit ETFs, by comparison with the inverse (short) versions. Investors, he said, are taking the view that current spreads are attractive enough to take the plunge and go long in the credit markets.
Here are the latest assets under management figures, taken from Deutsche Bank’s weekly “ETF liquidity trends” publication, proving Montanari’s statement.
| db x-trackers ETF |
AUM Long (€m) |
AUM Short (€m) |
| iTraxx Europe 5 year TR |
195 |
19 |
| iTraxx HiVol 5 year TR |
74 |
3 |
| iTraxx Crossover 5 year TR |
333 |
15 |
| iTraxx Europe Senior Financials |
26 |
3 |
| iTraxx Europe Subordinated Financials |
3 |
3 |
As we can see, assets are heavily skewed towards the long version of each ETF, outweighing the short (inverse) version by a factor of 10 for the iTraxx Europe fund, 22 for the Crossover, and 25 for the HiVol. In the more recently-launched bank senior and subordinated debt ETFs the contrast is not quite so stark, but only the long senior bank ETF has significant assets invested.
But, as the credit crunch has worsened, it’s only been one side of the paired ETFs that’s been offering a return to investors.
Take the db x-trackers iTraxx Crossover ETFs, which track the riskier names from the European corporate bond sector. The chart below shows the performance of the long and short versions since last January.
Investors in the long version have suffered a loss of over 10% of their capital since early last year, with the NAV falling from near-par to 87.16 at the 5 March close, while the short Crossover ETF has added 20 points in price over the same period (both ETFs earn the return on Euro overnight cash, so one ETF’s performance is not the direct inverse of the other’s). The Crossover index has hit record highs this week (i.e., credit spreads have widened to their greatest level yet), so the short ETF has definitely been the place to be.
If one looks at the performance of the senior and subordinated bank debt ETFs, over the shorter period since their launch in October last year, it’s a similar story.
The short versions of both senior and subordinated debt ETFs have steadily outperformed the long counterparts. The performance of the short subordinated ETF has picked up significantly in recent weeks, while the long version has sunk to its year lows. This is consistent with the deterioration in the market for bank equities, and concerns that losses will move further up the capital structure, with owners of lower-ranked bonds having to take a hit too.
But bank senior debt holders are also coming under pressure. While the government interventions of last autumn helped put at least a temporary floor under bank senior debt prices, the continuing deterioration in financial institutions’ balance sheets is causing renewed concerns over the safety of these instruments.
As the assets under management figures make clear, very few investors have profited from these trends, with most caught “long and wrong”.
In fact the predominance of long credit players in the ETFs could be a worrying sign – for a real market turnaround to occur, you’d want to see heavy participation in the inverse funds.
Of course the size of the funds invested remains relatively small and may not be representative of overall investor positioning in the credit markets.
But it’s a reasonable question to ask – is the skew in long/short credit ETF assets alerting us that the market situation is about to get even nastier?
