Manooj Mistry is the head of ETPs
in Europe, the Middle East and
Africa at db X-trackers
Breaking Ground In China And The Physical ETF Market
db X-trackers has faced some challenges over the past two years, but it continues to hold second place in Europe and break new ground with its innovative product launches
db X-trackers has already launched one of the first physically-backed China A-shares equities ETFs this year, and has now started converting 18 of its funds to a physically-backed replication structure. No mean feat for the first quarter of the year.
This level of forward-thinking in the market has positioned it second in Europe and in the UK by assets under management. However, it has not been a smooth ride for the German provider. It has lost market share over the past two years and uprooted its ETF business from the investment bank to its asset management arm, Deutsche Asset and Wealth Management.
But this makes the fact that it has retained its second place position all the more impressive.
The db X-trackers business was launched in January 2007, but it was not until the autumn of that year that it arrived in London. It launched 25 equity ETFs on the London Stock Exchange, taking advantage of the UK’s position as a key financial market with one of the largest populations in Europe.
It has carved out a niche in emerging markets and the ability to tap into largely inaccessible asset classes. Since then, db X-trackers has stormed ahead to be the second largest ETF provider in Europe and the fifth largest globally, when measured by assets under management.
The last three years have been spent focusing on developing its retail offering. This includes a new team – comprising two full-time staff working on the UK advisory side – and an updated structure to some of its products.
Impact of RDR
Most recently, it announced that it would be switching 18 of its funds from synthetic to physical replication in the first half of this year. It follows on from the successful shift of three of its synthetic ETFs in December 2012.
Manooj Mistry, head of exchange-traded products in Europe, the Middle East and Africa at db X-trackers, told ETF Report UK that in 2007 the RDR was already being talked about.
“We have been working towards RDR since 2008,” said Mistry. “We now have two people working in the UK doing all the bottom-up work that is needed to accommodate the requirements under RDR and make our products available for independent financial advisors and wealth managers.
“However, while RDR is not yet having an impact - it has only been in force for one year – our work is about sowing seeds and then having an impact.”
Mistry said that the decision to switch some funds from a synthetic to physical structure was based on client feedback, particularly from wealth advisors and IFAs in the UK, that they preferred the latter. Physical ETFs are easier to explain to clients, he said.
Last year, inflows into physical ETFs reached £16.4 ($27.06) billion, while synthetics saw outflows of £2.3 billion, according to ETFGI.
Moving to physicals
The ETF business initially blossomed in the investment bank, which led to the development of a swap-backed ETF structure. This is because the bank’s derivatives desk was able to facilitate this relatively cost-effectively and easily.
However, building an ecosystem to accommodate physical ETFs is costly. It involves buying each individual security to be included in each individual ETF. It is no simple undertaking and the provider became relatively quiet during 2013, closing some of its products and only launching a few.
It then announced in July last year that it is was closing and de-listing 18 ETFs and 18 exchange-traded commodity products across Europe, due to “sustainably low levels of interest”.
The challenge for any provider switching synthetic ETFs to a physical structure is ensuring that the efficiency and costs stay the same.
“It comes down to having a very efficient operational set-up, ensuring for example that any stock lending activities and any trading around index rebalances is done as efficiently as possible. We’ve been able to demonstrate that the physical products we already offer are achieving good tracking,” explains Mistry.