deutsche bank etfs - morningstar...
TRANSCRIPT
For Institutional Clients Only
• More than 200 ETFs listed in 11 stock exchanges globally1
• Over USD 50 billion in assets1
• Top 2 in Europe and Top 5 Globally2
• #1 ETF provider in Singapore and Hong Kong with 47 ETFs listed on SGX and 30 on the SEHK3
Deutsche Bank ETFs
ETFsDeutsche Bank
1
Source: (1) Deutsche Bank ; (2) Blackrock ETF Landscape end Jun 2012; (3) HKEX and SGX website, Aug 2012
For Institutional Clients Only
Why ETFs now ?
The opportunity set explained by macro timing is at all-time highs
— Globally, stock-selection opportunity used to account for approximately 80% of the total opportunity set, but
now it falls to around 40%. In the US, stock-selection opportunity also drops to 50%, from about 70% prior to 2008 financial crisis.
— The opportunity set explained by macro timing (e.g., country selection, industry rotation, and style timing) is
close to all-time highs.
Global – decomposition of opportunities US – decomposition of opportunities
100% 100%
ETFsDeutsche Bank
Source: Bloomberg Finance LP, Compustat, Haver, IBES, Russell, S&P, Thomson Reuters, Worldscope, Deutsche Bank Quantitative Strategy
0%
10%
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90%
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
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Stock-specific Country Style Industry Currency
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Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
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Stock-specific Market Style Industry
2
Trend of active managed mutual fund in US
ETFsDeutsche Bank
3
Source: “Active Share and Mutual Fund Performance,” by Antti Petajisto of the NYU Stern School of Business, September 2010
- The asset growth of US mutual fund AUM is on upward trend
- But the % of active management strategy is decreasing
Why? What are the other investment strategies present in US fund management?
Investment strategies in US mutual fund industry
Active investment
Enhanced
indexing
ETFsDeutsche Bank
4
Source: “Active Share and Mutual Fund Performance,” by Antti Petajisto of the NYU Stern School of Business, September 2010
Passive indexing
-% of assets that employs Active investment strategy is declining
-% of assets that adopts Enhanced indexing and Passive indexing strategies
are increasing
For Institutional Clients Only
Growth of the ETF Market Worldwide
ETFsDeutsche Bank
5
Source: Deutsche Bank Research, data as of end July 2012
For Institutional Clients Only
Growth of the ETF Market and assets distribution
ETFsDeutsche Bank
6
Source: Deutsche Bank, Bloomberg, Reuters, as of 3 Aug 2012
As of 31/7/2012 Europe US Asia
Asset Class Assets in % Assets in % Assets in %
Other 0.70% 0.80% 0.30%
Commodity 11.20% 8.70% 3.00%
Fixed Income 21.10% 20.00% 5.30%
Equity 67.10% 70.50% 91.40%
Total 100.00% 100% 100.00%
For Institutional Clients Only
Global Fund Flow
ETFsDeutsche Bank
7
Source: Weekly Fund Flows, 10 August 2012, Deutsche Bank Research
For Institutional Clients Only
HY CDS spreads compared to corporate bonds in Europe and in the US
ETFsDeutsche Bank
2010 - page 8
Source: Bloomberg. Markit website. Past performance is not a reliable indicator of future results.
This example is for illustrative purposes only. 8
- iTraxx Crossover Index comprises 50 equally weighted CDS
on the most liquid sub-investment grade European corporate
entities.
- Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-
indices: B, BB.
For Institutional Clients Only
MTS Italy Ex-Bank Of Italy BOT Index
MTS Italy BOT – ex-Bank of Italy Index Shares outstanding of ETF
ETFsDeutsche Bank
Datum 2010 DB Blue template
9
Source: Bloomberg (as of 20 Aug 2012)
�Zero coupon bonds with a maximum maturity of 12 months�Yield to Maturity: 1.781%�Duration: 0.42 years�Convexity: 0.46�Respective ETF raised 140 mn EUR within a month
For Institutional Clients Only
Focus on high dividend
Name of Index Percentage Change Annualized Return
MSCI Asia ex-Japan High Dividend Yield 435.86% 16.47%
MSCI EM Asia 278.16% 12.84%
ETFsDeutsche Bank
10
Source: Bloomberg and MSCI data.
Data as of 31 July 2001 - 31 July 2012, index all considered on USD basis. Past performance not indicative of future performance.
MSCI Asia Pacific ex-Japan 256.31% 12.24%
MSCI Asia ex-Japan 241.24% 11.80%
For Institutional Clients OnlyETF
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Green – Annual GDP Growth expected to
increase and maintain at
above 5% in 2013
Yellow – GDP Growth expected to increase by
1% or more in 2013
ETFsDeutsche Bank11
11Source: Deutsche Bank Research (Emerging Markets Monthly – 19 July 2012)
�
�
�
�
�
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1% or more in 2013
compared to 2012 (but stay below 5% GDP
growth)
Red – Drop in GDP growth
expected in 2013 compared to 2012
For Institutional Clients Only
Comparison between CSI300 vs. H shares indices
CSI 300 HSCEI FTSE/China 25
Number of Constituents
300 40 25
Market Cap
(bil. USD)2,235 1,626 1,808
ETFsDeutsche Bank
12
Source: Bloomberg, China Securities Index Co Ltd, as of 9 Jul 2012
(bil. USD)
Diversity
(top 3
sectors)
Top 3 sectors: 65.49%
36.88% Financials
15.77% Industrials
12.84% Materials
Top 3 sectors: 90.13%
56.29% Financials
24.99% Energy
8.85% Materials
Top 3 sectors: 87.3%
54.21% Financials
18.14% Telecom
14.95% Energy
Exposure to CNY
Direct Indirect Indirect
For Institutional Clients Only
Comparison between different A shares indices
CSI 300 FTSE A50
Number of Constituents
300 50
ETFsDeutsche Bank
13
Source: Bloomberg, China Securities Index Co Ltd, Issuer Website, as of 9 Jul 2012
Market Cap
(bil. USD)2,235 1,851
Diversity
(top 3 sectors)
Top 3 sectors: 65.49%
36.88% Financials
15.77% Industrials
12.84% Materials
Top 3 sectors: 81.55%
60.65% Financials
11.19% Industrials
9.71% Consumer Goods
For Institutional Clients Only
Deutsche Bank China A-Shares ETFs vs. RQFII ETFs
Deutsche Bank China A-Shares
ETFs
RQFII ETFs
Product type Providing different variations of China
A-shares exposure
- Broad based market exposure
- 10 sector ETFs
Currently limited to broad based market
exposure
Trading HKD/USD/EUR RMB
ETFsDeutsche Bank
Trading
Currency
HKD/USD/EUR
(However, index is RMB based,
hence ETF is ultimately exposed to
RMB FX movement)
RMB
Structure Synthetic Replication
(Counterparty risk mitigated by
collateral up to 120% of NAV, daily
mark to market, full transparency on internet, stringent selection criteria)
Physical, through full or statistical
sampling
Source: DB ETF website, SFC website
14
For Institutional Clients Only
DB ETF website collateral publication
ETFsDeutsche Bank
Datum 2010 DB Blue template
15
Collateral detail MTM daily with details including:
*Security Typee,b *Countrye,b
*Sectore *Exchange Listinge
*FX Exposuree,b * Index Exposuree
•Credit Ratingb * Detail of each componente,b
E – Equity B - Bond
Source: www.dbxtrackers.com.hk (data as of Aug 3 2012)
For Institutional Clients Only
Annualised Performance- Equal weighted model: 21.01%- Sharpe Ratio model: 20.07%- Top 5 Return model: 18.50%- CSI 300 Index: 17.79%
Performance analysis since April 2005
db X-trackers ETFsDeutsche Bank16
Source: Bloomberg & Deutsche Bank.
Rebalancing costs have not been considered.
Past performances are not indicative of future returns.
16
For Institutional Clients Only
Important Information
© 2012 Deutsche Bank AG
This presentation contains a short summary description of the above mentioned ETFs and is for discussion purposes only. A complete description of the funds is in the respective and most recent prospectus of the above mentioned ETFs. This presentationis not for distribution to, or for the attention of, US or Canadian persons. Without limitation, this presentation does not constitute an offer or a recommendation to enter into any transaction. When making an investment decision, you should rely solely on the finaldocumentation and any prospectus relating to the transaction and not this summary. Investment strategies involve numerous risks.Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) the effect of any transaction they may enter into, including the possible risks and benefits of such transaction and should ensure that they fully understand the transaction and have made an independent assessment of the appropriateness of such transaction in the light oftheir own objectives and circumstances. In no way should Deutsche Bank be deemed to be holding itself out as a financial adviseror a fiduciary of the recipient hereof. Deutsche Bank may make a market or trade in instruments economically related to fund units or derivatives mentioned herein, and/or have investment banking or other relationships with issuers of the relevant securities. Deutsche Bank actively manages various risks, and on occasion may deal in securities mentioned in this document or in relatedinstruments during the period between your receipt of this fact sheet and the award of any order. Whilst Deutsche Bank‘s trading or
ETFsDeutsche Bank
instruments during the period between your receipt of this fact sheet and the award of any order. Whilst Deutsche Bank‘s trading or hedging activities are not intended to have any significant impact upon prices, its dealings could affect the prices you pay or receive for transactions in related securities or fund units. Deutsche Bank, and its current and future subsidiaries, parents, affiliates, divisions, officers, directors, agents and/or employees, disclaim all liability with respect to this document and the information herein, and are not liable for any errors or omissions, or for any damages howsoever arising from any reliance placed thereon, save as required by applicable laws and regulations.
A full description of the terms and conditions of all sub-funds are included in the prospectus of db x-trackers and db x-trackers II. You can get the full and the simplified prospectus of each sub-fund of db x-trackers at db x-trackers, 49, avenue J.F. Kennedy, L-1855 Luxembourg, R.C.S. Luxembourg D-119 899.
Deutsche Bank AG is authorised under German Banking Law (competent authority: BaFin – Federal Financial Supervising Authority) and is regulated by the Financial Services Authority for the conduct of investment business in the United Kingdom. The registered address of Deutsche Bank AG, London Branch, is Winchester House, 1 Great Winchester Street, London EC2N 2DB.
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Trading ETFs Intelligently
ETF & Derivatives Trading Group (Europe)+44.20.7997.2072
www.knight.com
Chris Johnson – Director Tel. +1.212.479.7488 [email protected]
ETF Trading Group (Americas)+1.212.479.7480
www.knight.com
Paths of Execution
Implementation Strategy Definition
Risk tradeOver-the-counter (OTC) execution in which the broker
acts as principal
Standard agency order typesOn-exchange execution in which the broker acts as
1
Standard agency order typesOn-exchange execution in which the broker acts as an intermediary between a buyer and seller for a fee
NAV-based trade OTC execution at closing NAV of the fund less a spread
Hybrid Combination of two or more of the above
Considerations for Choosing a Path
1. Investor objective for the trade
• Time, specific price level, average cost of fill, etc.
2. Liquidity profile of the product
• Size of trade relative to expected secondary market volume available in desired ETF
• Expected volume available in underlying constituents relative to size of total trade
• Impact of time-zone differences
3. Broker capabilities3. Broker capabilities
• Understanding of ETF mechanics and experience trading the product
• Experience trading ETFs with exposure to the underlying asset class desired
• Authorized Participant status
• Sophisticated technology
• Pricing models
• Trading infrastructure
• Access to off-exchange liquidity pools
• Product evaluation and implementation advice
2
The O
vera
ll C
ost of
a T
ransaction
The O
vera
ll C
ost of
a T
ransaction
The Hidden Costs of a Transaction
Transparent costs are the “Tip of the Iceberg”
- Commissions
- Tax on the ETF itself and exchange levies
- Spread from NAV (in the case of a NAV transaction)
Hidden below the visible surface are the larger and less transparent costs
The O
vera
ll C
ost of
a T
ransaction
The O
vera
ll C
ost of
a T
ransaction
3
and less transparent costs
- Gap risk – the movement of the asset price between decision to trade and initiation of trade
- Impact cost – on a NAV transaction, the benchmark on the underlying assets is the close or NAV mark. This benchmark can move adversely away from the investor during a NAV transaction
- Opportunity cost – this is the movement of the asset price during a transaction. Slowing down a transaction to reduce impact cost could increase opportunity cost as the position is not obtained
Interdependencies of Execution Path, Risk, and Cost
Implementation Strategy Points of Consideration
Purchase or sale on risk
- Lowest gap risk for the client
- Certainty of execution price
- Broker bears the risk of hedging the position
- Tighter spreads (lower impact cost and greater certainty
of fair value) during certain liquidity peaks in trading day
Bro
ke
r b
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rs
gre
ate
r g
ap
ris
k
4
Purchase or sale through standard agency order type or hybrid order type
- Some control over either time or price, not both
- Liquidity of ETF correlated to underlying basket liquidity
- Alternative trading strategies via underlying basket
available
Purchase or sale based on NAV
- Highest gap risk for the client
- Final price not known until NAV is disclosed – normally
T+1 at earliest, sometimes 2-3 days
- Client usually pays full creation / redemption costs
Cli
en
t b
ea
rs
gre
ate
r g
ap
ris
kg
rea
ter
ga
p r
isk
Assessing an ETF’s Liquidity
ETF share volume traded and current depth of book
5
Source: Bloomberg on 4th May, 2012.
Assessing an ETF’s Liquidity
• Buy €50m (3.66m shares) of BNK
• 36.6 x creation baskets required to fill the trade
ID Name
Weight
[%] Shares
Price
[local]
Value
[EUR] % ADV
Avg
Bid/Ask
(full) [bps]
Intraday
Volatility
[%]
Expected
Impact
Cost [bps]
Estimated
Completion
Time Beta
HSBA.L HSBC HOLDINGS ORD 22.47 1,621,127 5.63 11,235,619 7.79 4.4 25.89 12.29 1h 13m 1.28
Expected volume in basket constituents relative to size of trade
6
Source: Lyxor, Knight.
Knight data was compiled on 4th May, 2012 and values / closing prices are from 3rd May, 2012.
SAN.MC BANCO SANTANDER ORD 7.56 825,869 4.58 3,782,478 0.86 6.0 55.73 5.68 10m 1.41
STAN.L STANDARD CHARTERED ORD 6.33 176,785 14.55 3,163,724 3.05 6.6 25.61 7.05 52m 1.37
UBSN.VX UBS N ORD 6.21 326,052 11.44 3,103,976 2.12 15.6 36.17 9.56 14m 1.63
DBKGn.DE DEUTSCHE BANK N ORD 5.29 84,734 31.23 2,646,253 0.89 5.1 46.01 4.80 11m 2.12
BNPP.PA BNP PARIBAS ORD 5.29 90,849 29.10 2,643,257 0.73 5.9 67.91 6.00 8m 2.39
BARC.L BARCLAYS ORD 5.03 960,286 2.13 2,514,865 1.83 7.8 53.76 9.23 32m 2.62
BBVA.MC BBVA ORD 4.36 446,129 4.88 2,178,449 0.83 8.3 55.86 6.19 9m 1.57
CSGN.VX CS GROUP AG N ORD 3.65 104,535 20.98 1,825,035 0.88 13.5 40.81 6.65 7m 1.75
NDA.ST NORDEA BANK ORD 3.15 238,443 58.70 1,575,277 1.90 11.1 39.91 8.61 23m 1.88
How an ETF Trades Relative to NAV
ETFs do not trade at NAV but rather within a “Fair Value Band”
The “Fair Value Band” sits around the
indicative NAV (iNAV) of a fund and is
affected by the following factors:
• Spread of underlying assets
• Commission charges on underlying
OTC Offer (equiv NAV +1bp)OTC Market
moves within
the fair value
NAV +15
iNAV
OTC Offer (equiv NAV +13bp)
OTC Bid (equiv NAV +7bp)
OTC Market
trading higher
due to buying
interest
7
• Commission charges on underlying
assets
• Taxation of the underlying
- Effects of tax on shares
- Effects of tax on currency
• Creation / Redemption charges
• Size of Creation / Redemption unit
• Variability of hedging results in process
(significant impact if hedge is not
available when trade is being executed in
ETF shares)
OTC Bid (equiv NAV -7bp)
the fair value
band (after tax)
NAV -45
OTC Offer (equiv NAV -30bp)
OTC Bid (equiv NAV -37bp)
OTC Market
trading lower
due to selling
interest
Example:
Create / Redeem costs = 5bp
Commission = 10bp
Tax on underlying sell = 30bp
How an ETF Trades Relative to NAV
The ETF trading price is affected not only by the underlying asset price itself, but also by other
factors including the Fair Value Band, market inventory and activity, and the creation / redemption
structure of the ETF
Inventory becomes scarce meaning that market
makers have to revert to the creation mechanism
to obtain ETF units to sell
ETF provider increases fees on NAV +
creation therefore “Fair Value Band” offer
increases compared to iNAV
Fair Value
Band Offer
8
Market makers are loaded with
excess inventory and revert to
redemption facility to reduce
positions on book
Band Offer
NAV
ETF Market
Fair Value Band
Bid
Assessing if iNAV is a True Indication of Fair Value
Transparency /
Certainty of
Underlying Pricing
XDAX GYMSE FP
IWRD LN
X7PS GY
ITKY LN
Key questions with respect to iNAV
calculations:
• Do the underlying assets price transparently?
- Equities are most transparent
- Bonds are less transparent
There is no one single way of assessing whether a published iNAV is a reliable indicator of the
true fair value of an ETF
Multi-Market
Multi-Region
Multi-Currency
Single Market
Single Region
Single
Currency
Scope of
ETF
Underlying
Universe
EMLD LN
IEMB LN
IHYG LN
RXP5EX GY
CSEM SW XMRD LN
- Bonds are less transparent
• Are the assets part of a single market, a single currency?
- Single currency and single market has less
room for error
- Multiple currencies, regions and markets are
error prone
• Is the iNAV independently calculated by an exchange or an index provider?
• Does the calculation involve proxy settings for markets that are not open?
9
Trading Example: PHB US
10
Trading Example: PHB US
11
Trading Example: PHB US
12
24bps outside
mid-point during
a holiday week in
the U.S.; size was
> 6x ADV
Trading Example: PRF US
13
Trading Example: PRF US
At best offer
during a holiday
14
during a holiday
week in the U.S.;
size was > 8x ADV
Closing Thoughts
1. Quality execution requires diligence on the part of the investor and
trading partner
• Objectives must be clearly communicated and understood
• Liquidity profile of the product and broker’s capabilities must be taken into account
2. Improved execution quality can mean additional basis points in net
performance
3. Choose your ETF trading partner wisely
15
The information in this presentation is for informational purposes only and is intended exclusively for persons who qualify as a
Professional Client or Eligible Counterparty. It is not intended as an offer or solicitation for the purchase or sale of any financial
instrument or as an official confirmation of any transaction. Knight does not provide legal or compliance advice and this
presentation is not intended to provide and should not be relied on as a source of legal or compliance advice. As such, it
Disclaimer
presentation is not intended to provide and should not be relied on as a source of legal or compliance advice. As such, it
should not be used as a substitute for consultation with professional legal or compliance advisers. All information contained in
this presentation is not warranted as to completeness or accuracy and is subject to change without notice. Knight Equity
Markets International, Knight Direct and Knight Link are divisions of Knight Capital Europe Ltd. Knight Capital Europe Limited
is authorised and regulated by the FSA, and is a member of the London Stock Exchange and other major European
Exchanges.
Knight Capital Group, Inc. provides its offering through its Global Markets business segment. Securities and services for the
Global Markets business are offered by Knight’s regulated broker-dealer subsidiaries duly registered with the SEC, the
Securities Investor Protection Corporation, National Exchanges and self-regulatory organizations. These entities are: Knight
Capital Americas LP and Knight Execution and Clearing Services.