Deutsche Asset & Wealth Management (Deutsche AWM), the asset and wealth management arm of German banking giant Deutsche Bank (NYSE: DB), has been a known entity in the burgeoning European ETF market.
Deutsche AWM, with its Deutsche X-trackers business, is the second-largest ETF issuer in Europe, an ETF market that hit a record $494 billion in combined assets under management. In February 2015, ETFs/ETPs listed in Europe saw net inflows of $12.49 billion the second highest month of NNA on record, behind $14.25 billion in net inflows in Jan 2015, according to ETF research firm ETFGI. [Europe ETF Assets hit a Record in February]
Growing its ETF footprint in the US is a core pillar of Deutsche AWM’s ambitions for its global passive business and broader Americas business. Deutsche has invested significantly as part of a strategic build out of its Deutsche X-trackers platform in the US with investment in product, distribution, thought leadership and marketing as it seeks to establish itself as the leading specialty ETF provider in the region and further grow its footprint as a top five global passive provider. The strategy is paying off with the business growing faster than any of the top 20 ETF providers in the US.
Buoyed by the rising U.S. dollar, which has triggered massive inflows to currency hedged ETFs, Deutsche AWM’s footprint in the U.S., by far the world’s largest ETF market, has grown exponentially. Entering 2014, the firm had just under $1 billion in U.S. ETF assets under management, a figure that surged to $4. 5 billion by the end of the year .
On the back of exponential asset growth for the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF) and the Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU), DAWM’s U.S. AUM tally is now over $11 billion. Said differently, the German ETF issuer has seen its U.S. assets more than double in less than 90 days. [Currency Hedged ETF Craze Just Starting]
“As the only international provider in the US, Deutsche brings a unique lens to clients. We’re strong believers in international portfolio allocation,” said Fiona Bassett, head of Deutsche AWM’s Passive Business in the Americas, in an interview with ETF Trends. “The strong dollar has really brought home to investors the impact of foreign currency on a portfolio.”
Investors are responding. Deutsche AWM first found noteworthy success in the U.S. ETF market in 2013 when the yen plunged leading up to and following the election of Japanese Prime Minister Shinzo Abe. That year, the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP), now home to nearly $885 million in assets under management, surged 42%, crushing the unhedged iShares MSCI Japan ETF (NYSEArca: EWJ) by 1,600 basis points.
“There is enormous investment opportunity in international markets and quantitative easing is bringing this front and central to investors, ,” said Bassett. “Currency hedged ETFs are a strategic opportunity, providing a powerful risk managed solution for investors seeking international exposure, not just a one-off cyclical trade.”
Investors seem to agree. The aforementioned DBEF, the currency hedged answer to the widely followed MSCI EAFE Index, has added $4.05 billion in new assets this year, a total surpassed by just one other ETF. DBEF now has over $6.2 billion in AUM In mid-October, DBEF had just over $800 million in assets under management. That number grew to $4.6 billion by the end of February, so in the span of just about two trading weeks, DBEF has tacked on $1.6 billion in new assets. [Currency Hedged ETF Continues Torrid Asset-Gathering Pace]
DBEU, Deutsche AWM’s currency hedged version of a diversified Europe ETF featuring Eurozone countries along with British, Swiss and Nordic stocks, has more than doubled in size this year, adding $956.5 million of its $1.8 billion in assets since the start of 2015.
As Bassett notes, global investors are taking increasingly sophisticated approaches to currency hedged ETFs and are beginning to embrace single-country offerings.
“The growth of single-country currency hedged ETFs reflects a level of sophistication in an asset allocation strategy,” she said. “The Japan story was well understood by investors an we’re starting to see investors think more tactically with single-country currency hedged ETFs.”
The Deutsche X-trackers MSCI Germany Hedged Equity Fund (NYSEArca: DBGR) is an example of that theme. On its way to topping the unhedged iShares MSCI Germany ETF (NYSEArca: EWG), the largest Germany ETF, by over 1,400 basis points this year, DBGR has added $106.5 million of its $159.1 million in AUM. [March Brings More Inflows to These Germany ETFs]
Basset also highlighted the Deutsche X-trackers MSCI South Korea Hedged Equity ETF (NYSEArca: DBKO) as an example of a currency hedge single-country ETF story that has resonated with investors. At the end of 2014, DBKO had just $5 million in AUM. The day before the Bank of Korea lowered interest rates last week, DBKO had $64 million in assets, but that number has more than tripled to $200.4 million.
Currency hedged ETFs are not done growing. Not if this is a typical strong dollar cycle. Dollar bull markets can last up to eight years, sometimes longer, meaning the current dollar bull cycle is not even half over.
“We’re still early in a strong dollar cycle,” said Bassett. “We’ll continue to see evolution. Four years ago, currency hedged ETFs didn’t even register among international ETFs, now they account for over 8% of international assets. There is scope for much further expansion as investors increasingly turn to currency hedged solutions and go deeper both at the country level and across asset classes.”
Deutsche X-Trackers MSCI Europe Hedged Equity ETF
