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PassiveBeat: Deutsche goes Trumpian and dumps min-vol

PassiveBeat: Deutsche goes Trumpian and dumps min-vol

The less-volatile candidate lost the US presidential election and now Deutsche Bank is betting that less-volatile equities should be shunned too.

In a recent rebalance of its ETF model portfolio, the bank sold its two core low-volatility positions – the iShares Edge MSCI Min Vol USA and EAFE ETFs.

Deutsche’s model ETF portfolio has returned 20.5% since its launch in October 2012, compared with 5.3% from its multi-asset benchmark so it would seem to be making some good asset allocation calls.

Deutsche replaced them with broader equity exposure, through the Vanguard Total Stock Market and Vanguard Total International Stock ETFs.

‘We switched the minimum-volatility core for a total-market diversified core in order to manifest our increasing appetite for risk,’ explained Sebastian Mercado, a strategist at Deutsche Bank.

Broad and deep

In selecting those two new ETFs, liquidity was a priority. ‘We looked for a product that could offer broad exposure including all sectors, and all market-capitalisation segments at low price,’ said Mercado.

‘In addition, we focused on products that could offer a good level of liquidity for trades of institutional size. We found three very good products that fit these requirements very well, and for the house-view portfolio in particular we have leaned towards the most liquid one [Vanguard Total Stock Market].’

Similarly for Vanguard Total International Stock, liquidity was the trump card. ‘For international equity exposure we sought the most diversified exposure both in terms of markets and market capitalisation,’ Mercado commented.

Drugs and money

To gain exposure to more specific beneficiaries of a Trump administration, Deutsche initiated positions in financials and biotech ETFs.

Deutsche selected the PowerShares KBW Bank Portfolio for the former sector, given its emphasis on large-cap banks and capital-markets businesses over smaller and regional banks. The iShares Nasdaq Biotechnology was chosen for its titular focus on biotech rather than healthcare conglomerates.

Outside equities in the model portfolio, Deutsche exited its allocation to US interest rates – expressed via the iShares 7-10 Year Treasury Bond ETF – ‘on the back of imminent rate hikes and a more likely path for future hikes’, Mercado stated.

‘At the same time, we have maintained our 15% credit exposure to the investment-grade segment on the back of potential support from a proposed US repatriation tax holiday,’ he continued. ‘We have also added a 5% allocation to inflation on the back of upside pressure driven by growth expectations.’

Hello inflation …

These views are implemented through the iShares iBoxx USD Investment Grade Corporate Bond and iShares Barclays Treasury Inflation Protected Securities (Tips) Bond ETFs.

‘From the broad inflation alternatives in the ETF market with over $100 million in assets – i.e. iShares Barclays Tips Bond, SPDR Bloomberg Barclays Tips, and Schwab US Tips – although at 0.2% it is not the cheapest one, iShares Barclays Tips Bond offers liquidity and trading efficiency second to none,’ Mercado observed.

… goodbye gold

Finally, Deutsche moved from gold to the dollar following the US election. ‘With lower market volatility and two major volatility catalysts – Brexit and US elections – mostly digested and processed by the markets, we see lower safe-haven demand for gold going forward and therefore don’t see a purpose for it in the portfolio any longer,’ Mercado said.

‘On the other hand, expected yield-curve activity going forward supports a strong dollar theme and therefore we have doubled our portfolio exposure to the greenback to 10%.’

The dollar is accessed through the PowerShares DB US Dollar Index Bullish ETF, which invests in currency futures contracts.

  • PassiveBeat brings together Citywire’s coverage of all things to do with ETFs, Smart Beta and passives in general. For feedback, comments and contributions, please tweet and follow us @passivebeat or drop us an email at passivebeat@citywire.co.uk

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