A Breakout Year For Deutsche X-Trackers

In case you overlooked it, Deutsche Bank’s ‘X-trackers’ brand of ETFs is getting serious traction.

Olly Ludwig recently wrote about First Trust enjoying a banner year. 2014 has certainly been great year for First Trust, but I think we’d be remiss if we didn’t also point out Deutsche X-trackers’ breakout year.

Deutsche X-trackers’ total assets pale in comparison to First Trust’s—at least for now—but assets under management growth of 158 percent in 2014 through Oct. 31 has been nothing short of spectacular.

Take a look at Deutsche X-trackers’ annual rise in AUM since 2011:

Source: ETF.com

To be clear, Deutsche Asset & Wealth Management (DeAWM) has a longer history in the U.S. ETF market outside of equities through their commodity pool products branded under PowerShares.

The $4.9 billion PowerShares DB Commodity Tracking ETF (DBC | B-86), launched in February 2006, is actually run by DeAWM, though that’s about to change. Come the first quarter of next year, PowerShares will fully take over DBC and 10 other funds in this suite of commodity ETFs, the two companies said last week in a press release.

DeAWM also has a massive ETF presence in Europe (branded as db X-trackers), where they are one of the largest ETF providers on the continent. Yet, as a stand-alone entity branded under Deutsche X-trackers in the U.S., they’ve struggled to gather assets until recently.

They’ve had the most comprehensive suite of currency-hedged ETFs, but investors largely shunned them in previous years in the weak dollar environment.

Then, Abenomics in Japan began to draw interest in hedged ETFs in 2013. This year, eurozone woes and the paring of quantitative easing in the U.S. has drawn even more attention to these products.

Currency-Hedged & China A-Shares

Two themes immediately jump out at me when I think of Deutsche X-trackers: currency-hedged ETFs and China A-shares ETFs.

Take a look at year-to-date growth in their four largest ETFs, measured by flows as a percentage of assets (through Oct. 31).

Source: ETF.com

Their largest fund, the $887 million Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF | B-64), has grown 245 percent this year as investors rushed to neutralize their exposure to the euro and Japanese yen, which, combined, account for about 50 percent of the MSCI EAFE Index’s currency exposure.

It’s also been a great year for the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR | D-55). ASHR launched with more than $100 million in seed capital in late 2013, and has grown 74 percent this year as investors piled in the fund to ride the latest rally in mainland Chinese shares.

But the $470 million Deutsche X-trackers MSCI Europe Hedged Equity ETF (DBEU | B-63) tops them all, growing a staggering 6,000 percent year-to-date, with no end in sight to ECB stimulus continuing to pummel the euro.

WisdomTree Comparisons

Some investors may be wondering how these hedged products differ from WisdomTree’s currency-hedged ETFs, which include the $10.7 billion WisdomTree Japan Hedged Equity ETF (DXJ | B-63) and the $3.2 billion WisdomTree Europe Hedged Equity ETF (HEDJ | B-52).

The main difference is that while Deutsche X-trackers take a vanilla, cap-weighted approach to its hedged ETFs, most of WisdomTree’s dividend-weighted hedged products are tweaked to benefit exporters by eliminating companies getting more than 80 percent of their revenues domestically.

HEDJ’s exporter tilt is even more pronounced, eliminating companies getting more than 50 percent of revenues domestically. HEDJ also focuses exclusively on eurozone securities, rather than Europe as a whole.

Deutsche X-trackers In A Sweet Spot

Even though WisdomTree has the lion’s share of assets for currency-hedged ETFs, I think the differences in strategy compared to Deutsche X-trackers’ beta-focused ETFs leave room for success for both issuers.

It’s worth pointing out that Deutsche X-trackers now has new competition from iShares, which recently launched currency-hedged versions of its iShares MSCI EAFE ETF (EFA | A-92) and iShares MSCI EMU ETF (EZU | A-62).

But DBEF has a big head start in the hedged EAFE space, while DBEU remains the only “broad Europe” hedged ETF. The recent dollar surge against the British pound only bodes well for DBEU because investors in broad Europe funds like the $11.5 billion Vanguard FTSE Europe ETF (VGK | A-98) might begin searching for alternatives to neutralize their currency exposure.

In the China space, Deutsche X-trackers also has a suite of China A-share sector ETFs in filing, which could be the first mainland China sector ETFs to market.

2014 has been a breakout year for Deutsche X-trackers, but if the dollar continues its surge and China A-shares rally ahead of the planned Hong Kong-Shanghai Connect program, 2015 could very well be another banner year for the issuer.

At the time this article was written, the author held a long position in ASHR. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.