Deutsche Bank Gives Some Unloved ETFs a Makeover (and Lower Fees)

  • Firm is changing strategy, costs of two currency-hedged ETFs
  • Fund issuer also trimming expenses on a Japan-focused product

Deutsche Bank AG is playing fairy godmother for a couple of its least popular exchange-traded funds.

Starting Friday, the firm will transform two U.S. traded currency-hedged funds -- which currently only buy stocks in Italy and Southern Europe -- to give investors unhedged exposure to equities in Germany and the broader euro-area, according to a statement from the Frankfurt-based lender’s money-management arm. And it’ll do so at rock bottom prices.

A weaker dollar has weighed on investor appetite for funds designed to weather currency volatility, shrinking portfolios at firms like Deutsche Asset Management, where more than half of the ETFs follow hedged strategies. The money manager’s U.S. ETF assets have dropped to about $13 billion, down from almost $20 billion at the end of 2015, data compiled by Bloomberg show. But one of the firm’s recent success stories is a junk-bond ETF priced far below its competitors.

“The incumbent ETF providers that have big funds in these markets, the funds are very expensive,” said Arne Noack, Deutsche’s head of exchange-traded product development for the U.S., noting that the firm doesn’t want to compete in places that already have a low-cost solution. “Our approach is to identify those areas where that hasn’t happened yet.”

The bank’s new euro zone- and Germany-focused funds (tickers EURZ and GRMY) will charge just 15 basis points in management fees, as will its Xtrackers Japan JPX-Nikkei 400 Equity ETF, which is slicing its expense ratio from 40 basis points. That’s the lowest cost for these exposures in the U.S., according to Noack, who sees these three funds as an international suite for investors.

Fee War

State Street Corp. last week slashed fees on 15 ETFs, joining BlackRock Inc. and Charles Schwab Corp. in offering funds for as little as $3 on every $10,000. That’s because 45 percent of inflows this year have gone into products that charge less than 10 basis points, data compiled by Bloomberg show, and issuers need to attract that cash to maintain market share.

This isn’t the first time that Deutsche Bank, the 14th-largest U.S. issuer by assets, has sought to beat the Goliaths on price. The firm’s Xtrackers USD High Yield Corporate Bond ETF, known as HYLB, has attracted almost $250 million since it started last December at 25 basis points, less than bigger funds from BlackRock and State Street.

But despite the makeover of these two currency-proof ETFs and the shuttering of five similar strategies back in May -- including a hedged version of the Japanese fund that’s now lowering its price -- Deutsche Bank hasn’t given up on hedging.

“The desire to have very granular asset allocation tools with a hedge wasn’t as strong as we anticipated” but currency hedging has entered “a much more mature phase,” Noack said. “The first phase has been purely tactical, so therefore it’s perceived as sort of a slowdown, but I think it’s just a change in the type of conversations being had.”

    Before it's here, it's on the Bloomberg Terminal.