ETF Due Diligence Series: Examining Xtrackers

Morningstar is taking an in-depth look at some of the biggest ETF providers in the market. This week we look at Xtrackers

Dimitar Boyadzhiev 10 July, 2019 | 11:04AM Hortense Bioy, CFA

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The growing popularity of exchange-traded funds means that investors now have tens of thousands of trackers to choose from. But where to start? Considerations including assets under management, tracking error, charges and the track record of the fund group. But with hundreds of ETF all promising to track the same market, picking a fund can seem an impossible task.

In a new series, Morningstar analysts take an in-depth look at some of the biggest ETF providers in the market. This week we investigate Xtrackers. 

The growth of Xtrackers since its inception has been impressive. From a small team within Deutsche Bank's Investment Bank, it has developed into the second-largest ETF provider in Europe, with a market share of 11%, offering a broad menu of funds spanning all major asset classes. The breadth of its product lineup makes Xtrackers a one-stop-shop solution for many investors.

Xtrackers is part of DWS Group, which oversees around €700 billion in assets under management. The majority of DWS’ share capital (around 77%) is owned by Deutsche Bank.

We value Xtrackers’ pragmatic approach to growing the business by responding to clients' concerns. The switch to physical replication and the incorporation of a multiple swap-counterparty model for its remaining range of synthetic ETFs are examples.

With the rapid transformation of Xtrackers, its portfolio management team has experienced an above average turnover rate, but it doesn’t seem to have negatively affected the funds’ performance. The retention rate of the senior portfolio managers is satisfactory.

The securities-lending programme appears to be efficient and tightly controlled for risk. However, the decision to use DB Agency Securities Lending as the lending agent may lead to a conflict of interest. In the past three years, DWS has taken positive steps to strengthen its investment stewardship duties. However, its coverage is not comprehensive as it solely targets the companies included in its "watchlist".

ETF Offering

Xtrackers’ offering of around 190 ETFs covers all main asset classes. ETFs are available to investors via three platforms. Two of them—Xtrackers and Xtrackers II— are domiciled in Luxembourg, while Xtrackers (IE) PLC is domiciled in Ireland. All three platforms offer a mixture of physical and synthetic ETFs. Xtrackers started as a wholly synthetic ETF provider, but in 2012, the decision was taken to introduce physically replicated ETFs. As of the end of December 2018, nearly three fourths of AUM was in physically replicated products. The choice of replication method will continue to be made on a case-by-case basis, depending on what is deemed more efficient. All Xtrackers ETFs are UCITS-compliant.

For equity ETFs, portfolio managers opt for full replication whenever feasible. For indexes with a wider scope or lower liquidity, the portfolio is likely to be more optimised. Fixed-income ETFs are typically managed using a stratified sampling approach. In some cases, for indexes with narrower scope and higher liquidity, the fund will use full replication.

Stewardship and Engagement

DWS has had a dedicated Corporate Governance Centre since 2016 as part of its chief investment office. The team, based in Frankfurt, is currently made up of six members and is responsible for voting and engagement.
 
The CGC is part of a dedicated ESG team of 10 individuals focused on supporting the integration of ESG into DWS’ investment process. DWS’ policy is to vote only for the companies included in its watchlist, which includes the most relevant equity holdings globally.
 
As of this review, the watchlist consisted of 700-750 firms, representing 60% of AUM in terms of voted meetings in physical equity ETFs. DWS does not exercise voting rights for the holdings of substitute baskets of synthetic ETFs. DWS uses recommendations issued by proxy advisors in line with DWS’ voting policy. The CGC team cross-checks for potential conflicts and carries out additional analysis.

The CGC carried out 170 engagements in 2018, up from 81 in 2017. The CGC carries out proactive engagements to address important governance-related concerns or in relation to major M&A transactions. In addition, the CGC responds to investee companies that approach it; this is normally done ahead of AGMs to enquire about voting intentions but also increasingly to seek opinions on ESG issues. DWS sends an annual letter to companies listing its expectations regarding key governance issues. It is followed by another letter outlining reasons behind the votes.

You can find the full report in "A Guided Tour of the European ETF Marketplace" here.

Read our analysis of: iShares, Lyxor, Vanguard, Invesco

 

 

 

 

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Dimitar Boyadzhiev  is a Passive Strategies Research Analyst for Morningstar

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