Deutsche Bank On Fixed Income ETFs

  1. Marco Montanari is Head of Fixed Income ETF structuring at db x-trackers in London.  His firm, which launched its first ETFs in June 2007, has been active in developing new varieties of fixed income ETFs, including those tracking money market and credit indices, and the first inverse bond ETF.  Earlier this week he answered Index Universe’s questions on the outlook for this part of the fast-growing European ETF market. Marco, fixed income ETF assets in Europe tripled during 2008. Do you expect this growth rate to continue?

    Montanari: I think it will continue, for the simple reason that if you look at the fixed income share of the mutual fund industry in Europe, it’s around 50%, while in ETFs it’s still 70/30 in favour of equities. Plus equity ETFs in Europe started in 2000, whereas fixed income ETFs only started in 2003.

    When db x-trackers launched its business we gave a big push to the bond segment, since we were the first real fixed income house to enter the European ETF market as an issuer, and we’ve been ahead of our competitors in developing new products – we launched the first money market ETFs, for example, which is a sector that has quickly gained €10 billion in assets. Deutsche Bank’s fixed income ETF assets were at €2.4 billion at the end of 2007, after six months of operation, reached €8.4 billion at the end of 2008, and are now €10 billion after two months of 2009.

    So we’re growing at over €500 million a month, and we think this is a sustainable rate. What type of fixed income ETFs have flows been heading into?

    Montanari: Last year the biggest inflows were to money market ETFs, since for most of the year there was a lot of uncertainty about the future direction of interest rates. This year we continued to see inflows into the EONIA money market ETFs in January, then in February we’ve seen a lot of money coming into the iTraxx credit ETFs, more than €300 million into the long versions, which will benefit if credit spreads decline. Investors seem to be anticipating a turnaround after the long rise in spreads – the sub-investment grade Crossover index is trading at levels which imply that half the names in the index will default, and clearly some people feel that this is too pessimistic.

    There have been large inflows into corporate bond ETFs as well, reflecting the same trend, but credit ETFs do not carry the interest rate risk that corporate bonds have, and the CDS or credit derivatives market is more liquid than the corporate bond market, leading to tighter spreads for credit ETFs. But a recent iShares press release showed that its Euro corporate bond ETF had reached €2 billion in assets, whereas your largest credit ETF, the iTraxx Crossover, is just over €300 million in size…

    Montanari: We face an educational challenge, and corporate bond ETFs have been around for much longer.  And investors have better knowledge of corporate bonds than of CDS. But it’s important for us to let investors know that there’s another option for them if they have a view on credit spreads, and then they can decide for themselves which type of fund they want.

    I should add, returning to the topic of fund flows, that we’ve seen close to €100 million of inflows to our short(inverse) iBoxx ETF, where investors are betting on an increase in Eurozone bond yields. There’s also continuing demand for short duration bond ETFs. On the other hand, we’re seeing relatively little interest in long-maturity bond funds.


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