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Deutsche Bank to Offer Physical-Replication ETFs

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Nov. 19 (Bloomberg) -- Deutsche Bank AG will follow Societe Generale SA in offering exchange-traded funds backed by bonds and shares amid concern over the use of derivatives to track the performance of underlying indexes.

The Frankfurt-based bank’s DB X-Trackers unit, Europe’s second-largest ETF manager, will, as of next month, sell ETFs on a number of benchmark equity indexes, joining existing swap-based products, the company said in a statement today. SocGen’s Lyxor Asset Management said in September it will offer funds that buy physical assets.

Investors last year pulled money from European ETFs that use derivatives to track performance, moving record amounts into ETFs backed by physical assets as the euro area’s debt crisis sparked concern about the finances of the banks that sell so-called synthetic products. DB X-Trackers manages 33 billion euros ($42 billion) in ETFs, according to its website.

“Investors will be able to go to a single provider and choose not only the type of market exposure they want, but also the type of tracking method they feel most comfortable with,” Thorsten Michalik, global head of DB X-trackers, said in the statement. “Some client segments have shown a preference for direct replication, and as a provider we aim to meet that demand.”

Regulators and companies such as Fidelity Investors have criticized ETFs that use derivatives to mimic stock, bond or currency returns. They have argued that clients risk losing money if the banks writing the swaps become insolvent. Managers of synthetic-replication methods say their products follow the underlying investments more accurately than ETFs that have to buy the physical assets. They also argue that their reporting standards are often higher than mutual funds.

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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