Deutsche Bank is to convert 18 of its largest exchange-traded funds (ETFs) from a synthetic model of replicating their indices to a physical one.
The products affected include the x-trackers ETFs following the FTSE 100, FTSE 250, FTSE All Share, MSCI Europe, MSCI Europe Mid Cap, MSCI Europe Small Cap, DAX, CAC 40, Euro Stoxx 50, Euro Stoxx Select Dividend 30, and MSCI Mexico benchmarks.
Deutsche Bank has traditionally favoured synthetic structures on the basis that they are cheaper and minimise tracking error, although critics have warned that they incur counterparty risk.
The transition from derivative to direct replication will take place between 6 January and 30 June next year. The physical exposure will involve either mirroring the index in its entirety or employ an optimised sample of the index, depending on the liquidity and size of the underlying equities.
Deutsche Bank stated that the ETFs ‘will not bear the costs associated with the switches’.
‘This move is part of Deutsche Bank’s strategy to make sure its ETFs are accessible for the retail market,’ commented Adam Laird, passive investment manager at Hargreaves Lansdown. ‘Synthetically replicated ETFs are not necessarily riskier, but many individuals like physical products as they are simple to understand. There has been a strong demand for ETFs, particularly equity, in 2013 and this move will make sure that x-trackers stay on investors’ radars.’