DeAWM to convert 18 synthetic ETFs into physical products

Dec 8th, 2013 | By | Category: Equities

Deutsche Asset & Wealth Management (DeAWM) has revealed plans to convert the index tracking methodology of a swathe of db X-trackers exchange-traded funds.

DeAWM has revealed plans to convert 18 synthetic ETFs into physical products.

DeAWM has announced its intention to convert 18 swap-based ETFs into physically replicated products.

The 18 ETFs affected by the decision are currently implemented using a swap-based (also known as “synthetic”) approach.

Between 6 January 2014 and 30 June 2014 these funds will transition to a physically replicated (or “physical”) approach, becoming what DeAWM calls “direct replication” ETFs.

Physical ETFs do not use derivatives to achieve the reference index exposure. Instead, they physically hold underlying index constituents.

The conversions are expected to take total assets under management in direct replication db X-trackers ETFs to approximately €9.5 billion, making DeAWM the second largest provider of physical ETFs in Europe after iShares.

Reinhard Bellet, DeAWM’s Head of Passive Asset Management, commented: “Our direct replication platform is now well established and is delivering the same high standards of transparency and operational efficiency investors traditionally associate with db X-trackers ETFs. This, together with the fact that in some areas investors have shown a clear preference for direct replication offerings, gives us the confidence to fully realise our physical replication capability.”

In recent years, there has been a marked preference among investors for the physically replicated ETFs – a preference borne out in asset flows, with recent inflows into physical ETFs far exceeding inflows into synthetic equivalents.

Investors’ primary anxiety with swap-based ETFs appears to be counterparty risk, namely the risk that a swap counterparty will default on its obligations. In the case of db X-trackers ETFs the swap counterparty is DeAWM’s parent, Deutsche Bank.

This anxiety has prevailed despite measures taken by DeAWM, and indeed other swap-based providers, to minimize counterparty risk. These measures include over-collateralisation, where the collateral posted exceeds the exposure to the counterparty, and safeguards guaranteeing the minimum quality and liquidity of collateral.

DeAWM is not alone in converting a number of swap-based ETFs into physical versions. Its Paris-based rival Lyxor, owned by Societe Generale, has also converted a number of ETFs and appears to be favouring the physical approach in new product launches.

The 18 ETFs involved in the transition are as follows:

db X-trackers Stoxx Europe 600 UCITS ETF
db X-trackers Euro Stoxx 50 UCITS ETF
db X-trackers MSCI Europe Index UCITS ETF
db X-trackers MSCI Europe Small Cap Index UCITS ETF
db X-trackers MSCI Europe Mid Cap Index UCITS ETF
db X-trackers MSCI Pan-Euro Index UCITS ETF
db X-trackers Euro Stoxx Select Dividend 30 UCITS ETF
db X-trackers FTSE EPRA/NAREIT Developed Europe Real Estate UCITS ETF
db X-trackers FTSE 100 UCITS ETF
db X-trackers FTSE 250 UCITS ETF
db X-trackers FTSE All-Share UCITS ETF
db X-trackers FTSE MIB UCITS ETF
db X-trackers IBEX 35 UCITS ETF
db X-trackers SMI UCITS ETF
db X-trackers DAX UCITS ETF
db X-trackers CAC 40 UCITS ETF
db X-trackers ATX UCITS ETF
db X-trackers MSCI Mexico Index UCITS ETF

The investment objective and the relevant reference index of the funds will remain unchanged, and the funds will not bear any of the costs associated with the conversion. However, shareholders of the db X-trackers Euro Stoxx 50 UCITS ETF should note that after completion of the transition the total expense ratio of the ETF will increase from 0.00% to 0.09% per annum.

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