Pound & Euro Saver

Lyxor (Soc Gen) and db-x (Deutsche Bank) are distributing money market ETFs that can be used to invest in EUR, GBP and USD money markets.

This funds are replicating and compounding everyday the performance of overnight cash investments, namely:

• EONIA (Euro OverNight Index Average) for the Lyxor ETF EURO CASH (CSH.P). EONIA represents the weighted average all the unsecured overnight € denominated borrowings
• SONIA (Sterling OverNight Index Average) for the db-x-tracker GB £ MONEY MARKET ETF (XGBP.L). SONIA represents the weighted average all the unsecured overnight £ denominated borrowings
• FED FUNDS EFFECTIVE RATE TOTAL RETURN INDEX for the db-x-tracker US $ MONEY MARKET ETF (XUSD.L). It will stick to the performance of the FOMC stated retaes.

The good

• Very tight bid-ask spreads and relatively low management costs
• Access to the money market.
• Even though these rates are for unsecured borrowing, Lyxor and DB seems to be holding collateral and entering into swaps to replicate these indexes, providing you with a slightly more secured products and enabling them to replicate more closely the performance of the indexes.

The bad

• Beware of the cost. Even though the bid-ask spreads are very tight you still have to pay your brokers.

Barclays Global Investors have recently launched two new ETFS:

iShares € covered bonds (ICOV.L & SCOV.L)

This fund replicates an index tracking the performance of € denominated covered bonds. Covered bonds are debt securities issued by corporates entities and are secured by a pool of assets. They are very similar to asset back securities created in a securitization process but there is a major difference: the bonds and the assets that back them are still on the balance sheet of the issuer (banks) and therefore:

• Assets have to be replaced if they are defaulting or prematurely reimbursed
• You have recourse on the bank and on the assets.

Covered bond where the preferred solution in Europe whereas seuritization was more popular in the US.

• On the investor point of you they offer more recourse than securitized assets
• On the bank point of you the mortgage are still on the balance sheet whereas it would prefer to have them off.

The good:

• The recourse on the pool of assets and on the issuer are likely to mean a AAA rating for these bonds (92% where AAA-rated at the time the fund factsheet was written)
• Those kind of securities are likely to yield slightly more than government bonds even if they have a similar rating.

The bad:

• They are riskier than AAA-rated government debt securities.
• 30% of the portfolio is made of Spanish covered bonds. My guess is that a significant part of it are mortgage based and we must seriously question and today there are serious questions about the strength of the Spanish housing market and the Spanish banks.

iShares Global Inflation Linked Bonds (IGIL.L)

This fund is replicating the performance of an index of Inflation Linked Bonds issued by various government (AAA-rated government are accounting for 83% of the bonds in the index). Those bonds are mainly libelled in all the major currencies (USD, GBP, EUR) as the US, the UK and France are the biggest issuers of inflation linked bonds. You will nevertheless have exposure to some more exotic currencies like the Australian dollar (AUD), the Canadian dollars (CAD).

The good:

• The coupon paid by those bonds depends on the level of inflation observed in the country. It helps to mitigate one of the risk when investing in bonds: your investment may lose value when it yields less than current interest rates and the current rates generally depends on inflation.

The bad:

• You are blending in one index and therefore one product several investments in different currencies. You will therefore be exposed to a currency risk while investing in this kind of product.

More

• iShares web site
• Covered bonds

I seems that I am missing the boat to china while I am investing my personal pension. The FT money this week end was quoting several financial advisers (not independent though) and analysts saying that people should invest massively on China and other emerging markets. I may be right but one of them was so looking forward at being quote by the paper that he ended up saying:

Investors in their 20s just starting to save could even 
consider putting all their monthly contributions into
emerging markets, he added. Once they have
accumulated a good-sized fund they can think more
carefully about asset allocation.

Link to the full article

I am pretty disappointed when I read such a comment. Not investing in China would surely be a very bad idea over the long term but investing my whole money in this market, today or ever, seems to be another bad idea. They are many reasons to be doubtful:

• It is against every diversification principles
• The decoupling many where expecting is obviously not happening
• How is Chinese economy going to react to hypothetically durably high commodity prices
• How will China react to the slowing US economy?
• What will happen after the Olympic Games

Do you feel like taking such a bet? That's a lot of question but even if it is a risky bet it can be highly rewarding.