EXV1

Overview

iShares STOXX Europe 600 Banks UCITS ETF (DE) (EXV1) tracks the STOXX Europe 600 Banks index and holds its constituents directly, a physical replication managed by iShares. Dividends are paid out to holders rather than reinvested, so EXV1 suits investors seeking regular income. The fund is domiciled in DE, which determines the withholding tax treatment applied to its dividends. Annual charges come to 0.46% of assets, and the fund holds 3.6B under management. Over five years the fund returned 21.2% a year on average, against 37.6% over three years. It is not eligible for the French PEA, but can be held in a securities account, a UK ISA or a German Depot. Its risk level is rated high. Launched on 2006-07-18, the fund is denominated in EUR and has 20 years of track record. It is a UCITS fund, so it follows the European framework on diversification, liquidity and asset segregation. Because EXV1 distributes, every payment is taxable in the year it is received, against the dividend allowance in a general account, while it stays sheltered inside an ISA or a SIPP. Domicile in DE sets the withholding the fund itself suffers on the dividends it receives, a cost absent from the stated fee but present in the return.

Ongoing charges of 0.46% place this fund 7th of 8 comparable funds, whose median is 0.25%. On £10,000 that costs about 46 a year and 460 over ten years at a constant amount, deducted daily and never visible on a statement: it shows up in the gap between the fund's return and its index's. At this level, neither low enough to be an argument nor high enough to be an obstacle, the decision rests elsewhere: on the index tracked, on the distribution policy, and on what your broker charges to buy.

Replication is physical: the fund actually holds the constituents of STOXX Europe 600 Banks, which makes its contents verifiable line by line in the issuer's report. Two points deserve attention. Securities lending first, practised by most physical funds to reduce costs: it earns a few hundredths of a point and creates an exposure to the borrower, covered by collateral, with the annual report stating the proportion lent. Rebalancing second: every change in the index's composition forces the fund to buy and sell, and those internal costs are not in the 0.46% headline. That is why two funds at the same price do not track their index with the same fidelity.

The fund is domiciled in DE, outside the two usual homes for European listed funds. Three checks come before buying: whether your broker lists it, since a fund outside the usual venues is not always dealable from a European account; what withholding the fund suffers on dividends it receives, which follows DE's treaties rather than your country's; and how your own tax authority treats it, an answer that can differ from the treatment of an Irish fund tracking the same index.

Income is distributed: the fund pays out the dividends it receives, usually one to four times a year. For a holder living off the portfolio that is what is wanted, since the income arrives without selling. For someone still accumulating it is a tax disadvantage in a taxable account: each payment is taxed in the year received, so the amount reinvested is reduced before it starts working again. Reinvesting by hand also costs a dealing commission each time and often leaves cash idle for want of the price of a whole unit. An accumulating class on the same index, where one exists, settles the question.

With 3.6 billion in assets and 20 years of history, this fund has the size and the record that make closure unlikely and the spread narrow. Three checks remain, once a year, none of which depends on the market. The ongoing charge, which an issuer revises without notice and whose gap to a competitor can invert. The tracking difference, the only figure that says whether replication stays faithful. And the methodology of STOXX Europe 600 Banks, which can change its selection or weighting rules without the fund's name moving, in which case what you hold has changed with nothing to announce it.

STOXX Europe 600 Banks is a sector index, and that is an explicit bet: the portfolio gives up diversification across sectors to take a position in one. Three consequences follow. Concentration first, often around twenty companies whose top three make up a notable share, so the outcome depends on identifiable firms. Internal correlation next, which defeats the idea of dampening risk within the sector. And timing last: a sector runs in long cycles, and entry rarely lands well when the purchase follows a strong rise already published.

Over one year the fund shows 29.0% against 21.2% annualised over five years: the recent year sits well above the long average. A gap in that direction mainly counsels care about the entry point, since what has risen sharply lately costs more today than a year ago, and the long average is the figure that best describes what to expect.

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