The STOXX Europe 600 Index is made up of a fixed 600 constituents. The components are weighted according to their free-float market capitalisation subject to cap of 20%. The index is reviewed and rebalanced quarterly.
Financial services are the index’s largest sector, with a 18%-23% weighting, followed by consumer defensive and healthcare (both 12%-15%).
Eurozone companies account for approximately half of the index value, followed by the UK (25%-30%), Switzerland (10%-15%), and the Nordics (8%-10%). Within the eurozone exposure, Germany and France have the largest weightings, accounting for 15%-18% each.
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With an ongoing charge of 0.07%, this fund is one of the cheapest passive offering in its category and has a substantial cost advantage relative to active mandates.
Index funds should provide the returns of their benchmark, less fees. However, this fund routinely outperforms the index. This can be attributed to the fact that the fund is domiciled in Luxembourg and enjoys a lower dividend-withholding tax rate compared with the index.
The fund's annualised tracking error over the past three-year period has been low. Tracking error is a measure of how consistently a fund tracks its benchmark index. The closer the tracking error is to zero, the better or more efficient the fund is.
Investors should also consider trading costs, including bid-ask spreads and brokerage fees, when buying and selling the ETF.
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Lyxor uses full physical replication to replicate the performance of Stoxx Europe 600 Net Total Return Index. The fund holds all the index securities in the same weightings stipulated by the index.
Portfolio managers may use futures contracts to equitise routine cash flows and stock dividends. This is standard practice in the management of physical replicated passive funds and helps minimise tracking error.
The fund complies with the UCITS diversification rules for passive funds. Thus, it maintains a cap of 20% for investments in shares issued by the same body, which can be raised to 35% in the case of exceptional market conditions--for example, in the event of strong volatility.
The fund does not engage in securities lending.
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Lyxor Stoxx Europe 600 ETF is one of our best picks for comprehensive access to the market of developed European equities.
With its fixed number of 600 stocks, the Stoxx 600 Index represents over 98% of the European developed equity market. Compared with the average offering in the Europe large-cap blend equity Morningstar Category, which includes actively managed funds, the Stoxx 600 Index has a very modest overweighting in large caps at the expense of mid-caps and small caps. At 0.07%, this exchange-traded fund is one of the cheapest Europe equity passive fund in its category.
The fund has delivered top-ranking risk-adjusted returns during the trailing three-year period, proving that it is a tough competitor to beat for active managers. Other funds tracking the same benchmark have delivered similar performance in the past five- and 10-year periods. Meanwhile, in terms of tracking, this fully replicated Lyxor fund shows consistent outperformance against both its benchmark and direct competitors. The fund is domiciled in Luxembourg and so benefits from much lower withholding tax rates on stocks listed in the eurozone and Sweden relative to those factored in for index calculations.
Over recent years, Lyxor has developed a well-deserved reputation for efficient management and, in particular, for ultra-tight tracking on its funds.
Overall, the Stoxx 600 is the most comprehensive index tracked by passive funds in the category, and it has proved difficult to beat by active managers over time. The fund is among the cheapest and best-performing passive option for this market exposure, which makes us highly confident on its ability to continue delivering returns above the category average. For these reasons, this fund retains its Morningstar Analyst Rating of Gold.
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This Stoxx Europe 600 Index is made up of large-, mid-, and small-cap companies and, as of this writing, excludes micro-cap companies.
Approximately 50% to 55% of the fund is invested in stocks listed in eurozone countries, mostly French and German companies. It also has significant exposure to UK stocks, which account for about 25% to 30%. But the countries where the fund's holdings are listed are not necessarily indicative of the portfolio's economic exposure. While most of these firms do a lot of business in their own countries, the largest holdings tend to have global operations.
Of all the index strategies in the Europe Large Cap Blend Equity category, the Stoxx Europe 600 and the FTSE Developed Europe provide the broadest, most extensive coverage of the market. With its fixed 600 stocks, the Stoxx Europe 600 Index covers between 98% and 99% of the universe. Meanwhile, the FTSE Developed Europe Index aims to cover 98% of the universe, and it held around 600 stocks as of this review. Another strategy that we view favourably is the MSCI Europe Index, which covers 85% of the market.
We hold a general preference for the broadest cap-weighted indexes, as they tend to be the most representative. The broader the index, the harder it becomes for active managers to boost relative returns over the long term through stock selection.
The Stoxx Europe 600's positive performance over the past five years has come from its allocation to French, UK, and Swiss equities. In addition, as this is an index fund, the portfolio managers keep the fund fully invested at all times, which provided a tailwind relative to the category during the past five-year bull market. However, maintaining a close to zero allocation to cash has the opposite effect in falling markets and might cause the fund to underperform its category peers.
Market-cap weighting skews the portfolio towards the largest stocks in the world, such as Nestle, Novartis, and HSBC. But the average market cap of the fund's holdings is in line with the category. There are no limits on sector or country weightings, but the fund's broad reach helps diversify risk. It includes 600 stocks, and the top 10 holdings represent only 16% of its assets.
Many of the fund's holdings enjoy durable competitive advantages. Of the holdings Morningstar equity analysts cover, 69% by market value carried a Morningstar Economic Moat Rating of either wide or narrow at the end of February 2019, which was comparable to the category average.
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There is no shortage of ETFs offering exposure to European large-cap equities. Among those tracking the Stoxx Europe 600 Index, the best performers are iShares Stoxx Europe 600 (0.20% ongoing charge) and Amundi Stoxx Europe 600 (0.18%). The former uses sampling while the latter uses synthetic replication.
Ongoing charges for market-cap-weighted Europe ETFs range from 0.07% to 0.35%, with the Lyxor Stoxx Europe 600 ETF levying the lowest charge.
Investors can also consider ETFs tracking the MSCI Europe Index at ongoing charges of 0.15% to 0.35%. With approximately 450 constituents, the MSCI Europe Index has a similar makeup to the Stoxx Europe 600, except that it has a slightly higher tilt toward larger companies. The best-performing options are Amundi ETF MSCI Europe (0.15% ongoing charge) and Lyxor MSCI Europe ETF (0.25%). Both funds use synthetic replication.
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