FBIST: Exchange-traded fund

Composition

The FTSE Istanbul Bond (FBIST) exchange-traded fund (ETF) is the first ETF to track the FTSE Turkish lira government bond index. It provides investors with exposure to a basket of Turkish fixed-income securities with a single transaction.

The FTSE index consists of fixed-income securities with a maturity of over 180 days and a minimum nominal size of TL1bn (€432m), including both straight-bullet bonds and zero-coupon bonds. The index is rebalanced monthly, with bonds removed when their maturities fall below six months, and new issues are included once a month after the close of the last business day.

FBIST allows investors to diversify their portfolio by investing in high-yielding Turkish bonds and T-bills, and reduce risk by investing in different maturities. FBIST can be traded on the Borsa Istanbul just like a stock, and can be bought and sold through any licensed bank or brokerage house. FBIST also enables trading of multiple securities via a single transaction and provides investors with the opportunity of instant implementation of investment decisions.

Trading

In additional to having lower management fees, ETFs offer other advantages over traditional mutual funds, such as ease of transaction. FBIST shares can easily be acquired through the Borsa Istanbul. Institutional investors can also create or redeem through the Takasbank in Turkey. FBIST offers liquidity for institutional investors through a creation-redemption process. It is based on a liquid index, which facilitates successful transactions even if the ETF itself trades infrequently. FBIST offers institutional investors the ability to gain exposure to a basket of fixed-income securities with a single transaction. FTSE Istanbul Bond ETF only has fixed-income securities issued by the Turkish Treasury and meets FTSE Turkish lira government bond index criteria.

FBIST offers diversification as it consists of a basket of fixed-income securities, reducing the risk of a single fixed-income security and providing liquidity and manageable risk. The ETF can be used to diversify an entire portfolio to minimise risk, while increasing the return potential in a bull market.

FBIST shares are priced continuously on the Borsa Istanbul during trading hours. Intraday net asset value is also disseminated by the fund manager every 15 seconds during trading hours. Continuous pricing allows intra-day liquidity for investors. Efficient intra-day pricing leads to minimal deviation from the net asset value of the fund.

Performance

FBIST was introduced in October 2007. In April 2008, FBIST won the most innovative EFT award for the Asia-Pacific region at the Global ETF Awards in New York. It has a management fee of 0.51% and contains 17 bonds in its portfolio as of end of March 2013.

Since its IPO, FBIST has yielded 100.52%, comparing with the 108.06% performance of its underlying index. FBIST earned a 16.99% return in 2012, with the fund’s value increasing by 1.27% in January and February 2013. At the same time, the benchmark bond saw its value decrease by 2.40%. As of the end of March 2013, the fund held assets under management of nearly TL58.3m (€25.2m) and had an average daily trading volume of around TL3.5m (€1.5m).

Central bank monetary policy actions like corridor shifts and increases in the required reserve ratio for both foreign exchange and Turkish lira liabilities have an important bearing on the fund’s performance. The central bank has been clear that it is averse to a real appreciation of the currency. Therefore, the monetary policy stance can mean a nominal depreciation of 4-5%, which, although not substantial in absolute terms, is sufficient to reduce much of the return currently offered by the bond market. This, and the liquidity squeeze created by hikes in the required reserve ratios, could mean trouble for the fixed-income market in the near term, particularly at the long end of the yield curve. The continuation of a steeper yield curve going forward can be expected.