Deutsche Bank’s Latest ETF Launches a Fee War in Junk Debt

Corrected
  • Fund’s expense ratio sets record low for high-yield bonds
  • Deutsche Bank adopts low-cost strategy to win fund assets

How low can they go?

Deutsche Bank AG is using the investing world’s time-honored ploy to win a bigger piece of the market for junk-bond exchange-traded funds. It’s cutting prices.

The German bank’s asset-management arm is offering an expense ratio of 25 basis points on a new high-yield ETF, the lowest fee among at least 50 such funds tracked by Bloomberg. The firm’s latest entry into the $53 billion high-yield ETF market is a passively managed fund that will track an index of dollar-denominated speculative-grade bonds.

Deutsche Bank, along with competitors Goldman Sachs Group Inc. and JPMorgan Chase & Co., is making a spirited push to leverage its asset management businesses and gain traction in the $3.7 trillion global ETF market. Vanguard Group Inc.’s success in cornering market share by slashing fees has prompted others to adopt a similar tactic.

“Sometimes the management fee is the innovation and this is an example of that,” Luke Oliver, the head of ETF capital markets at Deutsche Asset Management, said in an interview. “Within the fixed-income space this is a new factor.”

The Deutsche X-trackers USD High Yield Corporate Bond ETF, which starts trading on Wednesday, is the third new fixed-income fund for the German lender within the last two months. The move to undercut fees with the fund is a departure for Deutsche Bank, which had previously tried to differentiate itself in fixed-income with currency or interest-rate hedged funds. Its only other U.S. junk-bond fund started last year and has managed to attract just $9.2 million in assets.

Big Missile

The new fund’s similarity to the biggest junk-bond ETFs, albeit with a substantially lower fee, may help the firm draw some cash away from the competition, according to Oliver.

The launch of the Deutsche Bank ETF follows BlackRock Inc.’s decision two months ago to cut prices across its core ETFs in anticipation of a new rule that could spur more cash into passive funds. With an explosion of interest in new ETFs, more new managers are holding out the carrot of lower fees to boost their competitive position.

“They are launching the first big missile in a fee war in a category that has not engaged in such things,” said Eric Balchunas, an ETF analyst for Bloomberg Intelligence. “It’s proven successful in other asset classes and they are hoping it works for them here.”

The largest junk-bond ETF, iShares iBoxx High Yield Corporate Bond ETF, charges a fee of 0.5 percent, while the next biggest one -- the SPDR Bloomberg Barclays High Yield Bond ETF -- costs 0.4 percent.

(Updates with start of trading in sixth paragraph. An earlier version corrected the name of Deutsche Bank’s asset management business.)
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