Anticipate the recovery with this mix of ETFs (stocks/bonds)


On the other hand, it is necessary to underline the risks relating to this type of investment, in particular the confidence of investors in the quality of the audits carried out in this region of the globe as well as the geopolitical tensions between the East and the West, which materialize around the question of Taiwan.

To replicate this index, which has had an annualized return of 8.93% over the past 10 years, there is nothing better than Amundi’s ETF (the famous PAASI), eligible for the PEA and with assets under management approaching €440 million. Ongoing charges amount to 0.2% and the replication method is synthetic without creating too significant a performance difference.

For lovers of defensive strategies, the MSCI World Health Care Index is the ideal choice. They bring together the large and mid caps of the healthcare sector in 23 developed countries for a total of 153 constituents. NOT A WORD, A HPfizer, Roche and Merck are among the top 10 components.

Choosing to give more weight to the health sector in these troubled times seems to be a relevant choice. The sector’s stocks benefit from better visibility than other businesses, ie better recurrence of results in times of crisis.

Evolution of turnover per share in different sectors of the S&P500. Source: Standard & Poor’s

Investing in the behemoths of health also means surfing on several megatrends: the aging of the population, well-being, appearance, technology… Not to mention the fact that these companies are aimed at a global market and that there is a common desire (financial for the lobbies) to make basic care accessible to all.

None of the ETFs replicating this index is currently eligible for the PEA, but this does not mean that individual investors should eliminate it from their selection. Historically, the index has outperformed the legendary MSCI World. The Xtrackers ETF, with its $1.8 billion in assets and 0.25% management fees, is the most relevant. It also has the advantage of following a physical replication. If your broker does not allow you to add it to your securities account, choose the ETF with synthetic replication: Lyxor MSCI World Health Care TR UCITS ETF – Acc (EUR), its €800 million in assets and 0.3 % management fees.

Amundi MSCI World UCITS ETF EUR

The MSCI world index represents the performance of a wide selection of mid and large caps in 23 developed countries. With 1555 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The index has been constructed to be easy to replicate despite the number of companies it includes and it is largely this strategy that has made it successful. Like the vast majority of indices, it is capitalization-weighted, so it’s no surprise that the world’s biggest companies are among the main constituents (Apple, Microsoft, Amazon, Alphabet, Tesla, J&J, A HNvidia, Meta…).

Neck and neck with its big brother the MSCI ACWI (which contains more than 2900 constituents spread over 23 developed countries and 24 emerging countries), MSCI World presents an annualized return of 11.06% for a sharpe ratio of 0.8 if we look at stick to the MSCI factsheet for the last 10 years.

To replicate this index, two ETFs eligible for the PEA are suitable: that of Lyxor and that of Amundi. The main differences between the two are the ongoing charges and the net asset value. That of Lyxor is more expensive in fees but has a lower net asset value, which allows these positions to be reinforced more regularly (perfectly suited for a DCA strategy).

A little bond for dessert

This year, we are going through a rather particular context: bond markets and equities are falling simultaneously. Equities look increasingly attractive as they trade at increasingly low valuation ratios. At the same time, bond yields are rising exponentially as concerns about a potential entry into recession intensify. The yield on 10-year US government bonds (the global reference risk-free rate) is now above 3%, the risk of corporate default is increasing, which is materialized by credit spreads (difference between the risk-free rate and the cost of financing companies on the bond market) which are widening.

Bonds (here corporate Investment Grade) and equities fell at the same time.

The managers are therefore beginning to consider the opportunities on both markets and the question is to know which of the two the institutional investors will jump on first. It is for this reason that a retail investor must now keep an eye on bond yields even if he is usually interested in the equity market. A fall in credit spreads would reveal a warmer outlook for the economy in general. In my view, no rebound in the equity market will be taken seriously as long as bond yields continue their dizzying rise.

For investors who don’t want to choose, moving towards a 60/40 composition may be a smart choice. However, we must remain cautious on bonds even if they are gaining interest in the context described above (rise in key rates + widening of credit spreads). Remaining cautious means focusing on quality, ie favoring government bonds from developed economies and not looking for more risk than the Investment Grade (IG) category for corporate bonds.

The downside is that it is relatively difficult to find bond ETFs that exactly meet our needs. For example, if you want to simultaneously expose yourself to IG corporate bonds in the Eurozone and the US, you will be forced to do so via two separate ETFs. Then you have to consider the exchange risk, one will be quoted in $, the other in €, this may suit you but other investors may be looking for exposure in $ only. At this time, it is necessary to cover the position in €.

Important thing to know: a bond ETF is generally concentrated on bonds of equivalent maturity (1-3y, 3-5y, 7-10y etc.). In the description of a 7-10 year bond ETF, we expect to find a weighted average maturity within this range, it will actually be very close to 8.5 years and the manager will have to buy and sell bonds when this is necessary to maintain the average maturity at this level. The maturity of the portfolio will logically be lower than the average maturity. For example, for the iShares 5-10 Year Investment Grade Corporate Bond ETF, the weighted average maturity is 7.62 years and the maturation is 6.28 years.

The longer the duration of a bond or bond portfolio, the more sensitive the NAV (Net Asset Value) of the portfolio will be to changes in interest rates. Therefore, if you are convinced that bond yields will normalize and that the price of formerly issued bonds will recover, you will prefer a portfolio of long-term bonds which has a high duration to a portfolio of short bonds. term with a lower duration. If you feel that the markets are still not integrating the entire rate hike programme, delay your investment or reduce your risk by choosing a portfolio with a lower duration. Some see duration as leverage, this logic is likely to help you.

Below are the characteristics of a list of 4 bond ETFs that I find interesting:

  • iShares € Govt Bond 7-10 yr UCITS ETF EUR (Acc) to gain exposure to Eurozone government bonds (credit rating ranging from AAA to BBB or Baa2). Duration = 8.24 yrs, weighted average maturity = 8.45 yrs. Use of income: accumulation. Ongoing charge =0.2%.
  • iShares $ Treasury Bond 7-10 yr UCITS ETF EUR (Acc) to gain exposure to US government bonds. Duration = 7.96 yrs, Weighted Average Maturity = 8.63 yrs. Use of income: accumulation. Ongoing charges =0.07%.
  • iShares $ Corp Bond UCITS ETF to gain exposure to US corporate bonds (credit rating ranging from AAA to Baa2). Duration = 8.68 yrs. Weighted average maturity = 13.41 yrs. Use of income: accumulation. Ongoing charge =0.2%.
  • iShares Core € Corp Bond UCITS ETF to gain exposure to European corporate bonds (credit rating ranging from AAA to BBB or Baa2). Duration = 4.83 yrs. Weighted average maturity = 5.28 yrs. Use of income: accumulation. Ongoing charges = 0.2%.

Summary table of the characteristics of the ETFs presented in the article.



Source link -89