Weather political risk ETFs for the political wave
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Index Insights March 2017 Lyxor ETF | ETFs for the political wave 3 Tides could Welcome be turning in Europe Someone once wrote about the need to keep your head when all about you are losing theirs. As an investor, 2017 could test your mettle.
We don’t yet know how “hard” Brexit will actually be, nor whether Europe’s leaders will withstand the potential rise of populism. But the political climate could change dramatically, and with it the eurozone as we know it. Elections in France are the flashpoint. Heads could roll. Opportunities could arise.
We've created this document to help you through this unpredictable landscape. Its two halves illustrate ways you could protect yourself ahead of the elections (‘Expect the unexpected’) as well as ways to exploit a relief rally should risk fade afterwards (‘Ride the wave’).
Our key calls 4 The events to watch out for Expect the unexpected ►► March 15: Rutte wins Dutch election Smart Beta 8 ►► March 29: Brexit triggered Short Bonds 12 ►► April 23 & May 7: French elections Short Equities 16 ►► September 24: German elections Currency Hedging 18 ►► Q3 - Q4: Snap elections in Italy? Ride the wave
European equities 22 Single Countries 26 Mid caps and sectors 31 Why choose Lyxor? 35 Knowing your risk 36
Lyxor International Asset Management (“LIAM”) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see appendix at the end of this report for the analyst(s) certification(s), important disclosures and disclaimers. Alternatively, visit our global research disclosure website www.lyxoretf.com/compliance. Lyxor ETF | ETFs for the political wave 5 Our key calls Expect the unexpected Ride the wave Pages 6 -19 Pages 20 -33
Mid caps Smart Beta and sectors Short bonds / Single countries equities Broad European Currency hedging equities
Reduce risk with Minimum Dig deeper for more opportunities: Variance strategies ►► CAC Mid 60 ► FTSE Europe Minimum Variance Rising rates and inflation, Brexit Narrow your search if recovery ►► MDAX and a possible ECB taper could takes hold: Favour quality as ►► IBEX Mid uncertainty mounts weigh on bond markets: Take FX risk out of the equation as Populism fades, broad indices rise: ►► CAC 40 ► 10yr US Treasury Daily Short currencies start moving quickly: ►► Stoxx Europe 600 Banks ► SG European Quality Income ►► Euro Stoxx 50 ►► CAC 40 Daily Leverage ► 10yr US Treasury Daily ►► Euro Stoxx 50 Daily Hedged ►► Stoxx Europe 600 Oil & Gas ►► MSCI Europe ►► DAX Switch to strategies built to Double Short (GBP, USD) ►► Stoxx Europe 600 Basic Resources enhance returns: ►► MSCI EMU Small Cap ►► Daily LevDAX ► Bund Daily Short ►► Euro Stoxx 300 Monthly Hedged ► J.P. Morgan Multi-Factor Europe ►► Stoxx Europe 600 Construction & (GBP) ►► MSCI EMU Growth ►► IBEX 35 ► BTP Daily Short Materials ►► FTSE 100 Monthly Hedged ►► MSCI EMU Value ►► FTSE MIB ► BTP Daily Double Short ►► Stoxx Europe 600 Automobile & (USD) Parts ►► Euro Stoxx 50 Daily Short ►► Stoxx Europe 600 Retail ►► Euro Stoxx 50 Daily Double Short
►► CAC 40 Daily Short
►► FTSE MIB Daily Double Short Lyxor ETF | ETFs for the political wave 7 Expect the unexpected The only thing that could have positioned portfolios properly in 2016 was a crystal ball. Very few market participants priced in the possibility of Brexit or a Trump win.
2017 may feature plenty of surprises of its own, especially if the wave of populism regathers speed. At the very least, we should expect the unexpected.
Smart Beta can help reduce risk through Minimum Variance strategies. Short ETFs come in handy for hedging against – or exploiting – losses. Should currencies take a beating, tackle FX risk with currency-hedged products.
Smart Beta 8 Reduce risk with Minimum Variance strategies
Short ETFs 16 Protect yourself – or profit – by going short
Currency hedged 18 Take FX risk out of the equation Lyxor ETF | Expect the unexpected 9
Smart Beta The numbers Reduce Risk that matter
European markets have been surprisingly calm since June. Minimum Variance seek to reduce risk by selecting stocks that Even Trump’s victory in November couldn’t disturb the mood are less volatile, and less correlated in terms of performance. for long. But complacency can be dangerous. This could be the calm before the storm. FTSE Russell’s approach however goes a step further, adding some of the strictest diversification targets in the industry. This results in a more robust portfolio, which has The UK has triggered Brexit, while Europe's two biggest reduced the risk of investing in European equities by 26% economies – Germany and France – are going to the polls over the last ten years. between now and October. The wave of populism appears to have lost its energy, but last year taught us to expect the unexpected and to prepare our portfolios accordingly. Beware of concentration risk in Minimum Variance strategies* Minimum Variance strategies can reduce risk by 446 stocks up to 30%, while quality stocks could also help you MSCI Europe keep your head above water. A multi-factor approach could help enhance returns if the storm eases.
FTSE Europe % Minimum Variance 359 stocks Volatility has dipped since Brexit... but is this the calm before the storm? 67
12 month historical volatility – MSCI Europe and S&P 500 indices Did you know? The top 10 stocks of the FTSE 24% Europe Minimum Variance index account for 8% of the portfolio, approximately half the level of 22% concentration of peer indices.**
20%
18%
16% MSCI Europe % 160 stocks Minimum Variance 36 14%
12%
iSTOXX Europe % Minimum Variance 13 80 stocks 31/05/2016 10/06/2016 22/06/2016 04/07/2016 14/07/2016 26/07/2016 05/08/2016 17/08/2016 29/08/2016 08/09/2016 20/09/2016 30/09/2016 12/10/2016 24/10/2016 03/11/2016 15/11/2016 25/11/2016 07/12/2016 19/12/2016 29/12/2016 10/01/2017 20/01/2017 01/02/2017 13/02/2017 23/02/2017
MSCI Europe S&P 500
*Source: Lyxor International Asset Management/Bloomberg. Data period 30/12/2006-30/12/2016. Figures are relative to the market cap weighted FTSE Developed Europe index. Past performance is not a reliable indicator of future results. **Source: Lyxor International Asset Management. Data as at 28/02/2017. Peer indices used for comparison are the MSCI Europe Minimum Variance index, Source: Lyxor International Asset Management/Bloomberg. Data period from 31/05/2016 to 28/02/2017. Past performance is not a reliable indicator of future results. and the iSTOXX Europe Minimum Variance index. Lyxor ETF | Expect the unexpected 11
Robust Which route performance will you take?
Performance of FTSE Europe Minimum Variance vs. market cap and 1Y rolling volatility reduction
+5% 180 outperformance* 40% I am wary of the political situation FTSE Europe in Europe, but I want to stay Minimum invested in equities. I need a 160 35% Variance strategy to reduce my risk.
140 30%
120 25% A flight to defensive, quality 100 stocks is possible should results 20% surprise. SG European Quality SG European Income seeks the high quality Quality Income 80 +20%* companies most able to keep risk reduction* 15% their dividend promises. 60
10% 40 Should political concerns dissipate, European 5% equities could rally. I want to try to enhance my 20 J.P. Morgan returns. Our factor framework focuses on the Multi-Factor purest possible factor exposure for each of the Europe five core engines of return; Low Size, Value, Quality, Low Beta and Momentum. Aug 09 Apr 11 Aug 14 Apr 16 Feb 07 Jul 07 Dec 07 May 08 Oct 08 Mar 09 Jan 10 Jun 10 Nov 10 Sep 11 Feb 12 Jul 12 Dec 12 May 13 Oct 13 Mar 14 Jan 15 Jun 15 Nov 15 Sep 16 Feb 17
FTSE Europe Minimum Variance FTSE Developed Europe Volatility Reduction
Source: Lyxor International Asset Management/Bloomberg. Data as at 28/02/2017. Past performance is not a reliable indicator of future results. Did you know? *Figure refers to the average volatility reduction achieved over the period between 30/12/2006 and 30/12/2016. Approximately 84% of the stocks in the FTSE Minimum Variance Europe index are large caps. The iStoxx 600 index has a much larger tilt towards large caps, at 99.7%* Diversification pays off *Source: Lyxor International Asset Management. Data as at 28/02/2017.
Key performance stats* Annualised return Annualised volatility
MSCI Daily Net TR Europe Euro 2.63% 20.60%
FTSE Developed Europe Minimum 4.82% 15.38% Variance Net Tax Index
*Source: Lyxor International Asset Management/Bloomberg. Data period 30/12/2006-30/12/2016. Past performance is not a reliable indicator of future results. Why Lyxor for Minimum Variance?
Average risk Percentage of Global, European, US % reduction, & 3.7% % starting universe and Emerging Market 26 average excess return1 67 retained1 exposures available
1 Source: Lyxor International Asset Management/Bloomberg. Data period 30/12/2006-30/12/2016. Figures are relative to the market cap weighted FTSE Developed Europe index. Past performance is not a reliable indicator of future results. Lyxor ETF | Expect the unexpected 13
Short bonds Take a Stand Ready position
Many in the market have assumed the bond sell-off in the Prepare your portfolio immediate aftermath of Trump’s victory went too far, too fast. Single and double short ETFs provide the inverse or twice In our view, they haven’t adjusted to the new market reality. the inverse daily performance of their underlying indices.* You can use them to:
We find the current calm slightly eerie given the economic and policy news. To coin a phrase, “it’s quiet, too quiet”.
In our view, the global upturn, a fast-diminishing Manage Benefit from global output gap and rising inflation risks continue downside risk falling markets to be underestimated. Should things take a turn for the worse, short bonds could come into their own. Stand ready to hedge against, or exploit, losses.
Boost your Calm or complacency? How major bond markets have moved since Trump's triumph Hedge against Protect your Profit using a potential return falling markets investments single short ETF with a double 3 short ETF +0.54%
2.5
Many investors already have 2 February 2017: Inflows hit a one-year high on Short Bond strategy ETFs with EUR525M
% 1.5 -0.09 600 500
400 1 300 +0.02% 200 0.5 100
0 0 -100
-200
-300 08/11/2016 15/11/2016 22/11/2016 29/11/2016 06/12/2016 13/12/2016 20/12/2016 27/12/2016 03/01/2016 10/01/2017 17/01/2017 24/01/2017 31/01/2017 07/02/2017 14/02/2017 21/02/2017 28/02/2017
UK US Germany Mar 16 Apr 16 May 16 Jun 16 Jul 16 Aug 16 Sep 16 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17
Source: Lyxor International Asset Management, Bloomberg. Monthly data in EUR M from 01/03/2016 until 28/02/2017.
Source: Lyxor International Asset Management/Bloomberg. Data period from 31/12/2007 to 28/02/2017. Past performance is not a reliable indicator of future results. *Please note that both gains and losses are amplified when using double short ETFs. Lyxor ETF | Expect the unexpected 15
Which route will you take? How UCITS ETFs compare with other short and leveraged instruments
UCITS eligible Warrants and Futures Spread bets UCITS ETFs ETPs certificates contracts and CFDs
UCITS compliant funds? Yes No No No No
Between -2x Leverage factor No limit No limit No limit No limit and +2x US Treasuries German bunds Italian BTPs Maintenance of margin No No No Yes Yes Battered by rate rises Yields dragged higher with Political situation unravels. account by the investor? and inflation? US market. ECB Taper? Financial sector blow-up? Losses limited to Initial Yes Yes Yes No No investment?
Traded on public exchanges? Yes Yes Can be Futures exchanges No
Usually not but Multiple market makers? Yes Yes Yes No Short the market Double up can be
Yes, within strict Usually but not Collateralised? No No No UCITS guidelines always
Threat? Opportunity? Threat? Opportunity? I need a short term I want to profit I want a quick hedge I want to double my potential hedge for protection from a market fall with less capital profits or halve my capital at risk
The compounding effect The performance of both short and double short So, over the two days, the performance of the ETF (-1%) products is calculated daily, so returns are always is not exactly twice that of the Index (-0.25%) because of based on the previous day’s closing price. the daily reset of the leverage. A single short experiences similar slippage over time, without the doubling of returns. If an index with a starting value of 100 is down 5% to 95 at the end of a trading day, the associated double short This slippage means short and double short ETFs 10 Yr US Daily Double Bund BTP Daily Double Daily Double ETF (with the same starting value) should be up by 10% may not be suitable as long-term holdings. This is Treasuries Short 10 Yr US Daily Short Daily Short Short Bund Short BTP to 110, before fees. If the Index regained 5% the following especially true when markets are volatile, as the Daily Short Treasuries day, it would close at 99.75. The ETF however would fall compounding of positive and negative returns can by 10% to 99, before fees. have a material effect on long-term performance.
Why Lyxor for Short bond ETFs?
We have 6 ways to Largest range of Inverse We were the first to go short across fixed ETFs in Europe by number st launch double short ×6 income exposures1 of exposures and AuM1 1 ETFs in Europe in 20072
1 Source: Lyxor International Asset Management. $2.7bn in assets under management across inverse ETF exposures as at 07/12/2016. 2 First double short ETF launched by Lyxor in Europe in January 2007 (Lyxor CAC 40 Daily Double Short UCITS ETF). Lyxor ETF | Expect the unexpected 17
Short equities Which route Protect against losses will you take?
The rise of populism has dominated the front pages but hasn’t, as yet, derailed the EU project. The Dutch election result soothed some nerves. All eyes now turn to France. Eurozone equities French elections German elections Will populism prevail? Will the political scene turn sour? Is an upset on the horizon? The impact of some potential policies hard to predict. They could have lasting consequences for the eurozone as we know it. Should voters favour the central ground, Italian politics and banking crisis Catalan independence referendum Europe’s improving fundamentals may get the attention Will it all unravel in 2017 Will Catalonia stay or go? we feel they deserve.
But other events loom on the horizon, Germany goes to the polls in the autumn and the rise of the far right could Short the market Double up still reshape the teutonic political landscape. A snap election remains possible in Italy. Go short, or long, as the results roll in. Threat? Opportunity? Threat? Opportunity? I need a short term I want to profit from I want a quick hedge I want to double my potential hedge for protection a market fall with less capital profits or halve my capital at risk
Pessimism about the future of the EU (%) 80 Greece 69.0% Euro Stoxx 70 Euro Stoxx 50 CAC 40 50 Daily CAC 40 Daily Daily France Daily Short Daily Short Double Double Short ShortDAX x2 57. 6 % Short 60
Italy % FTSE MIB 50 54.6 IBEX 35 FTSE MIB IBEX 35 Daily Daily Double Daily Short Daily Short Double Short Short Germany 40 47.0 %
30 Netherlands 45.0% What you should know about gains and losses
20 The nature of these investments means losses as well Potential slippage vs. the benchmark means daily leverage, Spain as gains may be amplified. Even if you're convinced your daily short and daily double short ETFs should not be 40.1% investment will pay off, you should be able to tolerate considered as long-term holdings 10 substantial losses over a short period of time.
0 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Why Lyxor for Short equities? France Germany Italy Spain Netherlands Greece
Source: European Commission DG Communication, 01/07/2016. Data indicates the share of respondents for each country with a pessimistic view of the future of the EU. 11 ways to go First double 10+ years experience short, by region st short equity ETF yrs managing short ×11 or single country* 1 launched in Europe* +10 equity ETFs*
*Source: Lyxor International Asset Management. Data as at 28/02/2017. First double short equity ETF launched in Europe on 15/01/2007 (Lyxor CAC 40 Daily Double Short UCITS ETF). Lyxor ETF | Expect the unexpected 19
Currency hedging Which route Tackle FX risk will you take?
Risk rears its head in many forms, not least in currencies. Calling FX movements is notoriously difficult, especially when the geopolitical environment is so uncertain.
FTSE 100 EUR You only have to look at the shock Brexit vote in June and The wave of elections in Europe, lingering questions over The Economic Monetary Monthly Hedged the beating sterling took in its aftermath as an example of how hard Brexit will actually be and signs that Greece may Union may not withstand MSCI EMU (DR) CHF Monthly what can happen and how quickly it can happen. be on the brink of another crisis mean it’s time to think downward pressure on the Hedged Brexit negotiations may about the potential currency risks lurking in your portfolio. euro. I’d rather protect myself. weaken GBP further.
FTSE 100 USD Monthly Hedged When currency shocks can hurt you
January 2015: CHF unpegged from EUR June 2016: Brexit’s effect on GBP
1.3 E F 1.5 Brexit
1.25 1.45 -13% in less than 1.2 Euro Stoxx 50 Euro Stoxx 50 1.4 two weeks -19% in (DR) GBP Daily (DR) USD Daily 1.15 one day Hedge Hedged 1.35 The euro may not withstand 1.1 Weaker EUR 1.3 political unrest. I’d prefer to 1.05 overnight hedge this risk out of my 1.25 1 eurozone portfolio. 0.95 1.2 Euro Stoxx 50 Euro Stoxx 300 01/01/2014 01/07/2014 01/01/2015 01/07/2015 01/01/2016 01/01/2016 01/07/2016 (DR) CHF Daily (DR) GBP Monthly Hedged Hedged
Performance of G10 currency basket vs. EUR since Brexit
Did you know? USD We are pragmatic about how we hedge. AUD For some underlying indices, a daily hedge makes sense, while for others NZD a monthly hedge is sufficient. NOK
CHF
CAD
DKK
JPY
SEK Why Lyxor for Currency hedging? GBP 7 ways to hedge Over 3 years % Total Expense FX risk in equities* yrs currency-hedged Ratios starting -13% -12% -11% -10% -9% -8% -7% -6% -5% -4% -3% -2% -1% 0 1% 2% 3% 4% 5% 6% 7% ×7 +3 ETF expertise* 0.15 at just 0.15%*
*Source: Lyxor International Asset Management. Data as at 28/02/2017. Source: Lyxor International Asset Management. Data as at 21/11/2016. Past performance is not a reliable indicator of future results. First currency-hedged equity ETF share class launched 25/04/2013 (Lyxor Japan (TOPIX) (DR) UCITS ETF - daily hedged D-EUR). Lyxor ETF | ETFs for the political wave 21 Ride the wave While investors may need to tread, and trade, carefully this year, it’s not all doom and gloom. Opportunities may arise should risk fade and populism peter out. The Dutch election result, and the subsequent rally, could be a sign of things to come.
Look beyond the headlines and you can see Europe’s fundamentals are improving. If you are confident in its future, you can benefit in many ways.
Access broad exposures like the Euro Stoxx 50 or consider more targeted exposures like specific countries, capitalisations or sectors as the results roll in. Daily leverage products could help amplify short term returns if you’re prepared to take on the risk.
Broad equities 22 Access broad European exposures
Single countries 26 Narrow your search if recovery takes hold
Mid caps and sectors 31 Dig deeper for more opportunities Lyxor ETF | Ride the political wave 23
Broad European equities This year's headliners?
European equities could be this year’s headliners, despite the Breakdown of exposures possible political upheaval. ECB support is assured, fiscal 90% expansion possible and higher inflation likely by year end. 80% Should political risk fade attention will turn to Europe’s less demanding valuations, more generous dividend yields 70% and improving sentiment. Margin betterment could lead to superior EPS growth. 60%
50% European Equity indices overview 40% Defensive Cyclical
MSCI EMU Value 30%
20% MSCI EMU Small Cap
10% J.P. Morgan Equity Risk Premia - Europe Multi Factor Long Only (EUR)
0% Euro Stoxx 50 MSCI EMU Growth EURO STOXX 50 Net MSCI EMU Value Net MSCI EMU Small Cap FTSE Developed MSCI Europe Net J.P. Morgan Equity Net Return EUR Index Return EUR Return EUR Index Net Return EUR Index Europe Minimum Return EUR Index Risk Premia - Europe MSCI Europe Variance Multi Factor Long Only Core Periphery UK Nordics and other Net Tax Index (EUR) Index
MSCI EMU Growth Source: Lyxor International Asset Management. Data as at 28/02/2017.
FTSE Developed Europe Minimum Variance Key points Source: Lyxor International Asset Management. Data as at 28/02/2017. ►► Diversification vs. concentration – the MSCI Europe offers a wide exposure to the Continent. The Euro Stoxx 50 has a 70% exposure to Germany and France should you favour the core. Key points ►► Brexit – should Brexit damage UK equities, the Euro Stoxx 50 and MSCI EMU indices have far less exposure to the UK than the MSCI Europe ►► Recovery – factors like low size and value play very firmly to recovery. Should you wish to tilt towards small caps or value stocks, consider the MSCI EMU Small Cap and MSCI ►► The most balanced index in terms of exposure to core, periphery, UK and Nordics is the Value indices, respectively J.P. Morgan Equity Risk Premia Europe Multi-Factor index
►► Defence – the MSCI Europe, MSCI EMU Growth, and FTSE Developed Europe Minimum Variance indices offer the most balanced mix of defensive and cyclical exposures
►► Financials – the MSCI EMU Value offers a high Financials weighting Did you know? Lyxor ranked number 1 for tracking efficiency on key European exposures in 2016, including the MSCI Europe, CAC 40, FTSE 100, IBEX 35 and FTSE MIB.*
Add the footnote: *Source: Lyxor International Asset Management/Bloomberg. Data period from 31/12/2015 to 31/12/2016. The rationale and construction of the indicator are detailed in an academic paper published by Thierry Roncalli, former Head of Research & Development at Lyxor and Professor of Finance at the Evry University, and Marlene Hassine Konqui, ETF strategist. The academic paper can be downloaded from SSRN: http://ssrn.com/abstract=2212596 or from REPEC Lyxor ETF | Ride the political wave 25
The numbers Which route that matter will you take?
Number 2016 Return 5 Yr Return Index Cap Breakdown Top 3 Sectors Top 3 Countries of stocks (EUR) (EUR)
20.96% Financials, 35.76% France, EURO STOXX 50 Net 86.4% €30bn, 50 14.52% Industrials, 34.27% Germany, 3.72% 53.05% Return EUR 13.61% €10-30bn I like the eurozone. I'm not so 11.26% Consumer Discretionary 10.08% Spain Euro Stoxx 50 With ECB support assured, sure about post-Brexit UK 60.61% €30bn, MSCI Europe 20.29% Financials, 25.13% UK and fiscal expansion possible, MSCI Europe Net 26.86% €10-30bn 446 14.17% Consumer Staples, 15.25% France 2.58% 58.22% I favour Europe Return EUR Index 10.61% €5-10bn 13.19% Health Care 14.56% Germany 1.93% €2-5bn 13.08% €5-10bn 23.76% Industrials 23.88% Germany MSCI EMU Small Cap 50.63% €2-5bn 464 13.20% Financials 16.25% France 3.26% 99.68% I feel very confident about the Net Return EUR Index 22.19% €1-2bn Euro Stoxx 50 12.08% Consumer Discretionary 14.79% Italy 14.08% €150m-1bn Daily Leverage* eurozone. I'm comfortable doubling up on potential returns 60.50% €30bn 34.03% Financials 32.35% France MSCI EMU Value Net 29.81% €10-30bn 135 12.70% Industrials 27.70% Germany 6.89% 53.44% Return EUR Index 7.94% €5-10bn 11.84% Consumer Discretionary 13.77% Spain 1.74% €2-5bn 52.53% €30bn 23.40% Consumer Staples 32.12% Germany Growth means I want more MSCI EMU Growth Net 35.40% €10-30bn MSCI EMU Value 129 17.51% Consumer Discretionary 29.95% France 1.49% 71.70% specific, cyclical exposures Return EUR Index 10.91% €5-10bn 17.36% Industrials 11.68% Netherlands 1.15% €2-5bn 9.47% €30bn, FTSE Developed 19.63% Industrials 30.02% UK 35.45% €10-30bn I’m expecting small-caps Europe Minimum 162 14.88% Consumer Staples 10.96% France 23.7% 86% FTSEMSCI Developed EMU 36.69% €5-10bn Variance Net Tax Index 12.86% Consumer Discretionary 9.95% Germany EuropeSmall-Caps Min Var to benefit 19.38% €2-5bn 14.28% €30bn J.P. Morgan Equity Risk 29.79% €10-30bn 18.82% Financials 19.36% Switzerland Premia - Europe Multi 359 40.14% €5-10bn 16.84% Consumer Discretionary 15.61% UK -0.55% 63.24% Factor Long Only (EUR) 15.57% €2-5bn 15.00% Industrials 14.11% France Index 0.22% €1-2bn
Source: Lyxor International Asset Management. Data period as at 28/02/2017. Past performance is not a reliable indicator of future returns. I think the earnings outlook for Did you know? MSCI EMU European companies is bright. Global flows suggest the stampede towards Growth Post-Brexit performance performance in Europe in Europe I favour growth at this stage value may be losing momentum. European and UK investors are yet to respond, but with value 6% underperforming growth since the turn of the Trending Up year, it may just be a matter of time.*
5% MSCI EMU Growth *Source: Lyxor ETF Research, march 2017
4% FTSE Developed Europe *A key risk of leveraged investments is that by nature, losses as well as gains are MSCI Europe Euro Stoxx 50 amplified. For this reason, even though you are convinced that your investment will pay Minimum Variance off, you should be able to tolerate substantial losses over a short period of time. 3% MSCI EMU Small-Cap
2% One-month performanceOne-month MSCI EMU Value 1%
-1% Reversing Down Why Lyxor for European equities? -2% Over 15 ways to Largest Euro Most efficient 0% 5% 10% 15% 20% 25% explore broad Stoxx 50 ETF in the MSCI Europe ETF European markets* European market* in 2016** Performance since Brexit +15 #1
Source: Lyxor International Asset Management. Data from 30/06/2016 to 28/02/2017 (since Brexit), and from 01/31/2017 to 28/02/2017 (one-month performance). *Source: Lyxor International Asset Management/Bloomberg. Lyxor Euro Stoxx 50 (DR) UCITS ETF assets under management at €7.1bn. Data as at 28/02/2017. Past performance is not a reliable indicator of future returns. **Source: Lyxor International Asset Management/Bloomberg. Data period from 31/12/2015 to 31/12/2016. The rationale and construction of the indicator are detailed in an academic paper published by Thierry Roncalli, former Head of Research & Development at Lyxor and Professor of Finance at the Evry University, and Marlene Hassine Konqui, ETF strategist. The academic paper can be downloaded from SSRN: http://ssrn.com/abstract=2212596 or from REPEC http://ideas.repec.org/p/pra/mprapa/44298.html
6% Food & Bevrg
Utilities Real Estate 5% Trending Up
4% FTSE 100 Construction & Materials Stoxx 600 3% DAX CAC 40 IBX 35 2% One-month performanceOne-month FTSE MIB Auto &Parts 1% Oil & Gas
-1% Basic Resources Retail Reversing Down -2% Banks -10% 0% 10% 20% 30% 40% 50% 60%
Performance since Brexit Post-Brexit performance in Europe
5% Trending Up
4% FTSE 100 Stoxx 600 3% DAX CAC 40 IBEX 35 2% One-month performanceOne-month FTSE MIB 1%
Lyxor ETF | Ride the political wave -1% 27
Reversing Down -2%
-10% 0% 10% 20% 30% 40% 50% 60% Single countries Performance since Brexit
FocusingSingle countries on opportunity
6% Food & Bevrg
Better economicUtilities momentum,Real Estate inflation Single country exposures 5% Trending Up expectations picking up and more fiscal easing 35% should4% support single country exposures. Construction & Materials 30% 3% It’s been a largely positive year for European equities 25% – both2% in terms of performance and flows – despite
the performanceOne-month heavy political agenda, so what’s next? Auto &Parts 20% 1% Oil & Gas If markets view the outcomes of the forthcoming elections 15% favourably,-1% several opportunities could arise. Capture Basic Resources compelling country stories shouldRetail markets breathe a 10% Reversing Down -2% sigh of relief. Favour the core should the ECB taper. Banks 5% -10% 0% 10% 20% 30% 40% 50% 60%
Performance since Brexit 0% CAC 40 Total Return Index DAX INDEX FTSE MIB Net Total Return Index IBEX 35 Net Return Index
Consumer Discretionary Consumer Staples Energy Financials Post-Brexit performance in Europe HealthCare Industrials Information Technology Materials Real Estate Telecommunication Services Utilities 6% Source: Lyxor International Asset Management. Data as at 28/02/2017.
5% Trending Up The numbers that matter 4% FTSE 100
DAX Index Number Weight Market Cap 3% Exposure Top 3 sectors One-month performanceOne-month CAC 40 IBEX 35 name of stocks €150m-1bn €1-2bn €2-5bn €5-10bn €10-30bn €30bn Other
2% French 16.56% Industrials CAC 40 Total FTSE MIB 40 large 16.18% Consumer Discretionary 0.00% 0.00% 0.00% 0.70% 34.05% 65.25% 0.00% Return Index caps 14.11% Financials 1% German 18.61% Consumer Discretionary -1% DAX INDEX 30 large 16.92% Financials 0.00% 0.00% 0.00% 3.04% 19.84% 77.12% 0.00% caps 15.11% Health Care Reversing Down -2% FTSE MIB Italian 33.40% Financials Net Total 40 large 17.41% Utilities 0.00% 0.00% 11.14% 10.78% 45.09% 32.30% 0.69% 0% 5% 10% 15% 20% 25% Return Index caps 15.81% Energy
Performance since Brexit Spanish 33.32% Financials Source: Lyxor International Asset Management. Data from 30/06/2016 to 28/02/2017 (since Brexit), and from 01/31/2017 to 28/02/2017 (one-month performance). IBEX 35 Net 35 large 15.75% Utilities 0.00% 0.39% 5.09% 11.03% 30.71% 52.78% 0.00% Past performance is not a reliable indicator of future returns. Return Index caps 13.63% Industrials
Source: Lyxor International Asset Management. Data as at 28/02/2017.
Why Lyxor for Single countries?
12 ways to explore Largest ETFs in Europe 15 years experience European countries* on the CAC 40, FTSE yrs managing single ×12 MIB and IBEX 35* +15 country ETFs* *Source: Lyxor International Asset Management. Data as at 28/02/2017. Large cap benchmarks used for comparison are the CAC 40, DAX, and IBEX 35 indices.
*Source: Lyxor International Asset Management. Data as at 28/02/2047. First single country ETF launched 13/12/2000 (Lyxor CAC 40 (DR) UCITS ETF). Lyxor ETF | Ride the political wave 29
Leveraged equities Climb higher, faster
For investors looking to amplify their potential returns from Investors seeking to amplify returns through Leveraged ETFs a market rally, Leverage ETFs provide two times the daily tend to keep their powder dry until they know more. performance of their underlying indices.* This can be seen in the chart below, with relatively limited Leveraged ETFs could help you make the most of any flows in the months preceding major events such as Brexit rebound following a market-friendly election results. in June and Trump’s election in November, with inflows By doubling your exposure to a given index like the and outflows spiking mainly in the build-up and aftermath. CAC 40 or DAX, you open the door to twice the return. Monthly Net New Assets on leveraged European equity ETFs You also give yourself the opportunity to reduce the amount of capital you put at risk on any given day.* 150
100
50 Boosting daily returns with leverage 0 Average intraday performance of traditional indices vs. daily leverage indices over a one year period 2.5% -50
-100 2% -150
1.5% -200
1% Mar - 16 Apr - 16 May - 16 Jun - 16 Jul - 16 Aug - 16 Sep - 16 Oct - 16 Nov - 16 Dec - 16 Jan - 17 Feb- 17
Source: Lyxor International Asset Management, Bloomberg. Monthly data in EUR M from 01/03/2016 until 28/02/2017.
0.5
The numbers that matter 0%
Euro Stoxx 50 Euro Stoxx 50 CAC 40 CAC 40 DAX LevDAX IBEX 35 IBEX 35 FTSE MIB FTSE MIB Number of Leverage Leverage reset Average intraday Daily Leverage Leverage Double Lev Leveraged Index name Exposure stocks factor frequency performance over 1y Source: Lyxor International Asset Management, Bloomberg. Data period 22/01/2016-22/03/2017. Past performance is not a reliable indicator of future results. Eurozone large EURO STOXX 50 Daily Leverage Index 50 2X Daily 1.71% caps 600
500CAC 40 Leveraged GR Index French large caps 40 2X Daily 1.62% German large 400LevDAX Index 30 2X Daily 1.68% *What you should know about caps 300 Gains and Losses Spanish large IBEX 35 Double Lev Net 35 2X Daily 1.96% A key risk of leveraged investments is that by nature, 200 caps losses as well as gains are amplified. For this reason, 100FTSE MIB Leveraged RT Net-of-Tax Lux TR Index Italian large caps 40 2X Daily 2.42% even though you are convinced that your investment 0 will pay off, you should be able to tolerate substantial Source: Lyxor International Asset Management. Data as at 22/01/2016-22/03/2017. losses over a short period of time. -100 -200
-300 Mar - 16 Apr - 16 May - 16 Jun - 16 Jul - 16 Aug - 16 Sep - 16 Oct - 16 Nov - 16 Dec - 16 Jan - 17 Feb- 16
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Which route Mid caps and sectors will you take? Digging deeper
I’m relatively confident in the ECB’s ongoing support, and the Euro Stoxx 50 I really believe in the future of possibility of fiscal expansion Euro Stoxx 50 When markets are in recovery mode, mid caps revving up in Europe. Daily Leverage Europe, and am comfortable doubling up for the short term. tend to outperform larger companies. They could appeal to those with an adventurous spirit.
The likely combination of sustained ECB liquidity French elections are holding and the improving economic outlook bodes CAC 40 me back, but I think things are I’m happy the outcome will go well for mid- and small-caps. Should the ECB on the up. CAC 40 my way and fundamentals are choose to taper, more caution may be required. Daily Leverage picking up. I need in now. Peripheral countries in particular would be in the spotlight. Favour the core if the hawks win out.
German elections are still a way off. I prefer to tread DAX I think there’s gains to be Mid caps have more exposure to cyclicals than large-cap benchmarks carefully until new information DAX made in the short term, and comes through. CAC Mid 60 Gross Return Index Daily Leverage I want to make the best of them. I can stomach the risk. 25.40%
Spain and the Catalan MDAX PERF INDEX referendum doesn’t worry me IBEX 35 I see things shaping up 20.32% too much. I think there’ could for Spain sooner rather be potential in Spain. MSCIIBEX EMU 35 DailyGrowth Leverage than later. I’m convinced now is the time to act, and IBEX Medium Cap Net Return maximise potential gains. 21.17%
I think the risks of a full blown FTSE MIB Source: Lyxor International Asset Management. Data as at 28/02/2017. banking crisis and political Large cap benchmarks used for comparison are the CAC 40, DAX, and IBEX 35 indices. fallout are relatively low. I’m I believe risks in Italian tentatively long Italian equities. FTSE MIB equity markets are Daily Leverage overblown. I’m convinced markets are set to rise. Key points Did you know? The leverage factor of UCITS ►► If recovery prospects harden, look to mid cap indices ETFs is limited to 2. Anything for their higher weightings toward cyclical sectors like higher, and it’s not a UCITS ETF. financials and industrials ►► All of our single country mid-cap exposures have at least a 20% higher exposure to cyclicals than their large-cap equivalents* Why Lyxor for Leveraged equities? ►► Dig even deeper with Stoxx Europe sectors should fiscal policies change and the politics play out without We have 7 ways to Largest range of leveraged ETFs We were the first to any surprises amplify returns across in Europe by number of exposures st launch leveraged ETFs ×7 equity exposures and assets under management1 1 in Europe in 20062
1 Source: Lyxor International Asset Management. $1.2bn in assets under management across long leveraged ETF exposures as at 07/12/2016. 2 First leveraged ETF launched by Lyxor in Europe in June 2006 (Lyxor DAILY LevDAX UCITS ETF). Lyxor ETF | Ride the political wave 33
The numbers that matter
Overweight Number Index Number of cyclicals Weight Market Cap Index name Top 3 countries Cap breakdown 2016 return (EUR) 5yr return (EUR) Exposure of stocks name of stocks vs. large €150m-1bn €1-2bn €2-5bn €5-10bn €10-30bn €30bn Other 70.98% €30bn cap index 33.51% Spain EURO STOXX Banks 18.77% €10-30bn CAC Mid 60 25 26.35% France -4.60% n/a French Net Return EUR 7.60% €5-10bn Gross Return 59 25.40% 1.71% 5.87% 49.47% 32.95% 10.00% 0.00% 0.00% 13.06% Netherlands Post-Brexit performance in Europemid caps 2.65% €2-5bn Index 71.27% €30bn 32.87% UK STOXX Europe 600 Banks 22.69% €10-30bn MDAX PERF German 44 15.24% Spain -2.83% 29.74% 50 20.32% 0.00% 4.42% 23.79% 37.05% 24.66% 0.00% 10.08% Net Return EUR 3.73% €5-10b INDEX mid caps 11.99% France 2.31% €2-5bn 5% IBEX Trending Up Spanish 25.09% €30bn Medium Cap 20 21.17% 2.92% 27.41% 69.67% 0.00% 0.00% 0.00% 0.00% 32.62% UK 32.52% €10-30bn mid caps STOXX Europe 600 Retail Net4% Return FTSE 100 29 16.01% Spain 28.90% €5-10bn -4.76% 38.92% (Net Return) EUR 14.33% France 12.65% €2-5bn Stoxx 600 Source: Lyxor International Asset Management. Data as at 28/02/2017. Large cap benchmarks used for comparison are the CAC 40, DAX, and IBEX 35 indices. 0.84% €1-2bn 3% DAX 49.23% €30bn CAC 40 IBEX 35 28.63% UK STOXX Europe 600 Basic 31.41% €10-30bn 2% 20 15.17% Switzerland 65.71% -1.42% Resources Net Return EUR 14.24% €5-10bn One-month performanceOne-month 13.48% Australia FTSE MIB 5.12% €2-5bn 1% 27.10% €30bn STOXX Europe 600 33.05% France 54.22% €10-30bn Construction & Materials 21 22.26% Switzerland 11.47% 92.58% -1% 11.70% €5-10bn (Net Return) EUR 13.16% Sweden Sectors 6.99% €2-5bn Reversing Down 73.70% €30bn The-2% improving outlook and a potential post-election ramp 29.79% France STOXX Europe 600 Oil & Gas 16.97% €10-30bn up in fiscal spending could be supportive for construction, 20 17.86% UK 28.76% 5.26% (Net Return) EUR 3.67% €5-10bn -10% 0% 10% 20% 30% 40% 50% 60% 15.09% Netherlands infrastructure and materials. Improving employment 5.66% €2-5bn outlooks should prove beneficial for eurozone consumersPerformance since Brexit 57.10% €30bn STOXX Europe 600 62.58% Germany and by extension the Retail, Consumer Discretionary and 33.58% €10-30bn Automobiles & Parts 17 25.42% France -1.65% 84.60% 7.19% €5-10bn Autos & Parts sectors. (Net Return) EUR 6.73% UK 2.13% €2-5bn
Single countries Source: Lyxor International Asset Management. Data as at 28/02/2017. Post-Brexit performance in Europe
6% Food & Bevrg European sectors key points: Utilities Real Estate 5% Trending Up ►► Infrastructure spending – if fiscal spending does pick up, Basic Resources and Construction & Materials could benefit 4% Construction & Materials ►► Energy – if deals limiting supply hold, Oil & Gas looks well valued 3% ►► Sentiment improves – Retail and Automobiles & Parts are geared to a recovering consumer 2%
One-month performanceOne-month Auto &Parts ►► Financials bounce – should profit growth outweigh risk, consider European Banks 1% Oil & Gas
-1% Basic Resources Retail Reversing Down -2% Banks -10% 0% 10% 20% 30% 40% 50% 60% Performance since Brexit Why Lyxor for Equity sectors?
Source: Lyxor International Asset Management. Data from 30/06/2016 to 28/02/2017 (since Brexit), and from 01/31/2017 to 28/02/2017 (one-month performance). 5 ways to access 20 ways to explore The largest and most Past performance is not a reliable indicator of future returns. European mid caps* European sectors* liquid European banks ×5 ×20 #1ETF in Europe* 6%
5% Trending Up *Source: Lyxor International Asset Management. The largest and most liquid European banks ETF refers to the Lyxor STOXX 600 BANKS UCITS ETF, and is based on assets under management, and bid/ask spread over a one year period. Data as at 28/02/2047.
4% FTSE 100
3% DAX
One-month performanceOne-month CAC 40 IBEX 35
2% FTSE MIB
1%
-1% Reversing Down -2%
0% 5% 10% 15% 20% 25%
Performance since Brexit Lyxor ETF | ETFs for the political wave 35 We are Why choose Lyxor? the original Our success is built on a history of innovation and a constant drive to provide investors with better, more efficient ways to pioneers access more investment opportunities around the world. With over 15 years of commitment to performance, risk control, liquidity and transparency, it’s no surprise that Lyxor ranks third in Europe with EUR 56.4bn of ETF assets under management* and second in terms of the liquidity of its ETFs.
As one of the most experienced ETF providers, Lyxor has the scope to offer greater choice when it comes Range All asset classes to your investment. With more than 200 products spanning all asset classes, geographies, sectors and types, our investors enjoy the freedom to choose precisely where and how they want to invest.
However, it’s more than just the choice; it is our absolute commitment Lxyor ETF Quality to tracking efficiency, and our Funds you relentless focus on quality that tells can rely on investors they can trust us wherever they want to invest, and whatever their investment goals.
Heritage 3rd largest ETF issuer by AUM*
*Source: Lyxor International Asset Management, Bloomberg. Data as at 20/03/2017. Liquidity data refers to period between January 2016 and January 2017. Lyxor ETF | ETFs for the political wave 37 Product Snapshot
Expect the unexpected Ride the wave
Main Base Benchmark Bloomberg Main Base Benchmark Bloomberg ETF name ISIN TER (bps) Income AUM ETF name ISIN TER (bps) Income AUM Ticker currency currency benchmark Ticker currency currency benchmark
Smart Beta Broad Equities
FTSE Europe Minimum LU1237527160 MVAE FP 20 Acc 120 EUR EUR AWDEUMVN EURO STOXX 50 (DR) FR0007054358 MSE FP 20 Dist 7,112 EUR EUR SX5T Variance MSCI Europe FR0010261198 MEU FP 25 Dist 1,489 EUR EUR M7EU J.P. Morgan Multi-Factor LU1290894820 LYX5 GY 40 Acc 78 EUR EUR JPERPLMF Europe Index MSCI EMU Growth FR0010168765 GWT FP 40 Dist 30 EUR EUR M7EM000G
SG European Quality MSCI EMU Value FR0010168781 VAL FP 40 Dist 179 EUR EUR M7EM000V LU0959210278 SGQE FP 45 Dist 22 EUR EUR SGQENTR Income NTR MSCI EMU Small Cap FR0010168773 MMS FP 40 Dist 213 EUR EUR M7EMSC Short Bonds EURO STOXX 50 FR0010468983 LVE FP 40 Acc 239 EUR EUR SX5TL 10Yr US Treasury Daily Short LU1541273568 US1S 20 Acc 11 USD USD SGIXTYS1 Daily Leverage
Daily Double Short 10Y Single countries: standard & leverage FR0011607084 DSUS FP 20 Acc 59 USD USD SGIXDSTY US Treasury CAC 40 (DR) FR0007052782 CAC FP 25 Dist 3,813 EUR EUR CACR Bund Daily Short LU1523099700 BUNS FP 15 Acc 69 EUR EUR SGIXRXS1 DAX (DR) LU0252633754 DAX FP 15 Acc 1,005 EUR EUR DAX BTP Daily Short LU1523098561 BTP1S IM 40 Acc 38 EUR EUR SGIXIKS1 FTSE MIB FR0010010827 MIB FP 35 Dist 817 EUR EUR FTSEMIBN Double Daily Short BTP FR0011023621 BTPS FP 40 Acc 429 EUR EUR SGIXDSBT IBEX 35 (DR) FR0010251744 LYXIB SM 30 Dist 662 EUR EUR IBEXNR Short Equities Daily Leverage CAC 40 FR0010592014 LVC FP 40 Acc 210 EUR EUR CACGL
EURO STOXX 50 Daily Short FR0010424135 BSX FP 40 Acc 116 EUR EUR SX5TS Daily LevDAX LU0252634307 LVD FP 40 Acc 267 EUR EUR D1AJ EURO STOXX 50 Daily FR0010424143 BXX FP 60 Acc 90 EUR EUR SX5T2S Mid-caps & Sectors Double Short
Daily Short CAC 40 FR0010591362 SHC FP 40 Acc 33 EUR EUR CACSH CAC Mid 60 FR0011041334 CACM FP 50 Dist 4 EUR EUR CM1GR
FTSE MIB Daily Double Short German Mid-Cap MDAX FR0011857234 MD4X GY 40 Dist 11 EUR EUR MDAX FR0010446666 XBRMIB IM 60 Acc 138 EUR EUR FMIBI2X (XBear) IBEX Mid FR0011855188 IBXM SM 50 Dist 3 EUR EUR IBEXCN
Currency Hedging STOXX Europe 600 FR0010344630 AUT FP 30 Acc 66 EUR EUR SXAR Automobiles & Parts EURO STOXX 50 (DR) USD FR0012399806 MSEU LN 20 Acc 7,112 USD USD SX5DU Daily Hedged STOXX Europe 600 Banks FR0010345371 BNK FP 30 Acc 678 EUR EUR SX7R
EURO STOXX 50 (DR) GBP STOXX Europe 600 FR0012399772 MSEX LN 20 Acc 7,112 GBP GBP SX5EDHB FR0010345389 BRE FP 30 Acc 160 EUR EUR SXPR Daily Hedged Basic Resources
EURO STOXX 300 (DR) GBP STOXX Europe 600 LU1237272825 MFEG LN 30 Acc 66 GBP GBP SXEMHB FR0010345504 CST FP 30 Acc 49 EUR EUR SXOR Monthly Hedged Construction & Materials FTSE 100 USD FR0013186582 100H LN 30 Acc 958 USD USD UKXHEUSD STOXX Europe 600 Oil & Gas FR0010344960 OIL FP 30 Acc 232 EUR EUR SXER Monthly Hedged STOXX Europe 600 Retail FR0010344986 RTA FP 30 Acc 14 EUR EUR SXRR Lyxor ETF | Expect the unexpected 39
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