Lyxor launches Spanish government bond ETF

Feb 21st, 2013 | By | Category: Fixed Income

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Lyxor, a leading European provider of exchange-traded funds (ETFs), has launched the Lyxor ETF MTS Spain Government Bond All-Maturity (ES10), a new ETF providing exposure to Spanish government bonds. The fund has been listed on the NYSE Euronext and is linked to the MTS Spain Government Bond Index.

Lyxor launches Spanish government bond ETF

Lyxor has launched a new ETF on the NYSE Euronext providing exposure to Spanish government bonds.

The MTS Spain Government Bond Index, which was introduced by MTS Indices in 2011, is composed of government bonds of varying maturities issued by the sovereign government of Spain.

To be eligible for inclusion in the index, bonds must have a fixed coupon and standard bullet maturity, and have no embedded options or convertibility features. Bonds must also be quoted on the MTS platform, have an outstanding volume of at least €1 billion, and at least one year to maturity. The MTS platform is a multi-dealer-to-client electronic market for trading bonds.

The index has 28 constituents with an average coupon rate of 4.39% and a current yield of 4.67%. Its duration is 5.67 with an average maturity of 7.63 years. Reflecting the debt profile of the Spanish government, almost half of the constituent bonds are due to mature within five years and just one-eighth of the bonds extend beyond 15 years. (Data as of 31 January, 2013.)

The bonds are currently rated BBB- by S&P, one level above junk status, and are assigned a negative outlook. S&P recently warned of a possible downgrade for Spain, citing the country’s struggle with high debt levels and soaring rate of unemployment.

Francois Millet, Product Line Manager ETF & Indexing at Lyxor, said: “The MTS Spain Government Bond Index is the most accurate and representative benchmark for Spanish sovereign debt. By tracking it with our new ETF, investors now have plain and direct access to this market”.

Jack Jeffery, CEO of MTS, added: “We are delighted that Lyxor has again chosen to create ETFs based on MTS indices. The MTS Spain Government index is the first to measure the performance of Spanish government bonds using the high standards and transparency of the MTS Indices methodology.”

The fund is UCITS IV compliant and tracks its index via a collateralised swap-based replication approach. It has a total expense ratio (TER) of 16.5 basis points

The fund will likely compete against the iShares Barclays Spain Treasury Bond ETF (SESP), which launched in May last year and is listed on the London Stock Exchange and the Deutsche Börse.

The iShares fund tracks the Barclays Spain Treasury Bond Index and is managed via a sample-based physical replication process. Like the MTS index, the Barclays index only includes bonds with a minimum remaining time to maturity of one year; however, the Barclays index also includes smaller issues, down to a minimum amount outstanding of €300 million.

Despite the inclusion of smaller issues, the yield and maturity profile is very similar to the MTS index and both funds do a good job of providing low-cost exposure to Spanish government debt. The iShares fund is a little more expensive, with a TER of 20 basis points, but some investors may prefer its physical replication process. For investors more concerned about tight index tracking (i.e. low tracking error), the swap-based approach of the Lyxor fund may be preferable.

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