By ETF Heat Map Team
At a quick glance, it appears that ETF investors are starting to question the overall stability of Deutsche Bank, and are starting to lose faith in Deutsche Bank’s expansive family of exchange traded funds. This trend as observed by the outflow of approximately $6.7 billion (USD) from Deutsche Bank ETFs in YTD 2016. However, as we dive deeper, we note that this sell off has more to do with the decreasing popularity and demand for Deutsche Bank ETF product offerings, and less to do with fears that the European bank might be in serious financial trouble when it comes to Deutsche Bank’s ETFs.
Deutsche Bank is making efforts to change and improve its operational structure in order to make up the lost performance and business. The bank is being inspired by efficient banking strategies employed by competitors such as Goldman Sachs and JPMorgan. As some investors shy away from one of Europe’s largest investment bank, now might potentially be a good opportunity to purchase some Deutsche Bank products at competitive rates due to the pre-emptive fear mongering and bad publicity surrounding the bank.
Todd Rosenbluth, the director of ETF and mutual fund research at CFRA, proposes a different way to look at the declining demand for Deutsche Bank ETF products by stating that, “The challenge for them (Deutsche Bank) has nothing to do with the bank itself and more to with their assets are primarily focused on their international equity products. Investors have been moving money out of those products in 2016, with concerns about economic prospects in Europe, concerns about Japan, and adding on to it the dollar has not done what it did last year.” Therefore, it seems investors are more concerned by some of Deutsche Bank current ETF offerings rather than the overall stability of one of Europe’s largest financial institutions.
Deutsche Bank has now become the 11th largest supplier of ETF products with approximately $13.3 billion in assets according to FactSet. The bank dropped from 10th to 11th place after approximately $6.7 billion flowed out of Deutsche Bank ETFs in 2016. This has been led by outflows in currency hedging ETF products, and ETF products that held a bullish view on a strengthen U.S. dollar and growing European economy.
For example, the size of the Deutsche X-trackers MSCI EAFE Hedged Equity ETF, which is a currency hedge ETF, reduced by approximately 40% over the past year yet it underwent a reported 2% reduction in price.
Recently, Deutsche Bank commented that, “Despite outflows, we continue to believe we are in the environment when currency hedging delivers value over unhedged strategies. Currencies continue to add considerable volatility to performance, and our outlook is for the US Dollar to strengthen against the foreign currencies. This paired with positive carry in many markets, makes currency hedging a strong proposition.”
Robert Clark, from S&P Global Market Intelligence, said that the future of Deutsche Bank’s ETF business remains “uncertain” as Deutsche Bank might be forced to sell off parts of their asset management division, including ETFs, due to mounting financial troubles. However, Deutsche Bank representatives seem to disagree with Mr. Clark’s sentiments.
Deutsche Bank representatives clearly stated that, “Deutsche ETFs has been one of the most innovative and fastest growing ETF businesses in the US in recent years. During these periods of cyclical redemption, we have had successes in new products as we continue to build and invest in our business.”
Deutsche Bank argues that it’s currency hedged ETFs are cyclical and will eventually regain popularity. In fact, market share for the bank within the currency hedged products space reportedly increase from 31% to 34% this year. Therefore, it seems that Deutsche Bank might actually be justified in saying that inflows and outflows into the currency market ETFs is cyclical and not a case for alarm. Although, it might be arguably in Deutsche Bank’s best interest to introduce more popular currency hedged products in order to re-spark investor interest in their family of ETF products.