Thorsten Michalik is the Frankfurt-based global head of db x-trackers at Deutsche Bank, which has recently entered Asia's exchange-traded fund (ETF) market. Deutsche Bank launched four ETFs, branded as db x-trackers, on the Singapore Exchange in late February.
The offerings are the bank's first batch of ETFs in Asia and include the S&P 500 Short ETF, which is Asia's first "inverse" ETF. This tracks the S&P 500 Index, but in the opposite direction. Investors who expect the S&P 500 Index to fall can buy this ETF, as it is based on the short index which will rise when the main index falls. The other ETFs are the MSCI Taiwan Total Return Net (TRN) Index ETF, the FTSE/Xinhua China 25 ETF, and the S&P CNX Nifty ETF.
Michalik spoke with AsianInvestor about Deutsche Bank's aggressive plans to grow its ETF market share in the region.
Why did you choose the four ETFs that you recently launched in Singapore?
Michalik: I was responsible for the warrant business for Deutsche Bank in Asia from 2003 to 2006, and one thing I discovered then is Asian investors want to see a product that is ticking during their time zone. Therefore, we decided to choose ETFs with Asian underlying assets. Some exchanges also asked us if we could bring in these sorts of products. For example, if we brought in a FTSE 100 ETF, the underlying assets would not have moved during the same time zone.
For the S&P 500 Short ETF, we wanted to show to the market that we are innovative. After all, we have more than 100 ETFs in Europe. The S&P 500 Short ETF has nothing to do with our view to either go short or long in the American market. It is just a product, a toolbox that we offer. We don't advise whether people should go long or short. One thing about the S&P 500 Short ETF, it will also be ticking during the Asian time zone because there is the S&P 500 Futures that also trades during the Asian time zone.
What is your expectation for the demand for the S&P 500 Short ETF and the other three ETFs?
It depends if you are talking about short-term investors who just want to trade or if you are talking about long-term investors. We already have Asian clients who already bought these kinds of ETFs in our European listings so I'm pretty sure there will be some kind of demand. You will not always see this reflected on the European exchange because our clients can trade directly with us.
For our short product, it will take a little while for demand to pick up, but we see huge potential in terms of people trading intraday. We have 14 short products in Europe and on the average, we have more than 2,000 daily on-exchange trades in these products and more than 2 billion euros in terms of assets under management. There is a huge demand for these products in Europe and we also see this happening here in Asia.
When we come to a market, we start with a couple of products to make ourselves familiar with the market in terms of pricing and in terms of the systems set up, and then we proceed with more products. We will bring much more products to Asia, at least 20 additional listings in the region this year, which will include some more Asian flavour or ETFs manufactured by our team here.
What kind of investors are you targeting for these funds?
We target purely institutional investors. But you will also see interest from retail investors. In terms of our business strategy, I would say 80% of our focus is on institutional investors. Where we have a chance to approach retail investors, we will also do so, in accordance with local regulatory requirements.
You ventured in the European market in January 2007. What has been your experience in the European market?
When we started in Europe, we started with eight products. And then in about two or three months, when we were comfortable in terms of trading and managing these products and in terms of the set up, we introduced more products. We now have more than 100 products with more than 270 listings in Europe. The same applies to Asia. We have a start and there's more coming.
In the last couple of years, ETFs were seen as more of a passive, market access product. But ETFs have become more of a solution now. We have commodities, sovereign bonds, money market, long/short, leveraged ETFs. We want to make sure that we take a supermarket approach and that our shelves are always full -- filled with market access products.
Deutsche Bank is active in almost all the asset classes. We are very strong when it comes to equities. We are the leader when it comes to fixed income, and when it comes to commodities. We are very strong when it comes to foreign exchange. And we can open all these asset classes by ETFs.
Another way Deutsche Bank differentiates itself from other ETF providers is we provide liquidity because we are our own market maker for our funds. We can guarantee more or less liquidity as long as the underlying market is liquid. As long as we know the underlying market is liquid, we can provide prices. Around 50% of our trades in Europe are done off-stock exchange. Even if the product is an ETF, people know that they can call Deutsche Bank and they will receive a price for the ETF. There is a misconception in the market that ETFs are not liquid, but that's not true because we are the market maker. Even if you don't see a price or a trade happening on the stock exchange, it doesn't mean that the ETF isn't trading.
What is your strategy for developing the business in Asia? Do you have a specific market that you are targeting after Singapore?
It is really just us coming out with the business in Asia. Just have a look at our strategy in Europe. We came out in our home market in Germany because it made sense, but then we immediately started to crossover to other countries and we also followed the supermarket approach. We will do exactly the same in Asia.
How has the crisis affected demand for ETFs?
Globally, $260 billion came into the ETF industry globally. Of that total, $180 billion went to the US, $62 went to Europe and $18 went to Asia. These are net inflows.
How does this compare to previous years?
It is a huge increase, no doubt about that. And the reason for that is people are looking for a transparent product -- products that are liquid that they can get in and out of very quickly and products that they understand. It really comes back to the solutions and market accessing. We created a money market ETF in the middle of 2007 which raised €6.5 billion in Europe and that is now the largest and the most liquid ETF is Europe. This is called the European Overnight Interest Rate (EONIA) ETF and this was a product that was not available before.
One of the most important things when it comes to the ETF industry now is not just providing market access but providing solutions. The next big product that we saw in terms of inflows is sovereign bonds. We have a wide range of sovereign bond indices which we replicate via our ETFs. There are lot of inflows in these kinds of products because investors want to park their money in sovereign bonds, but in a liquid way. With one trade, investors can have access to the entire sovereign bond universe in Europe, which is possible because of the ETF.
The ETF AUM in Asia is still lagging that of the US and Europe. How can the region catch up?
It's a chicken and egg problem. We always have to see where we are in terms of the US and other markets. ETFs in America were introduced in 1993 and they only started to kick off around 1998-1999. In Europe, they were introduced in 2000 and they started to kick off around 2005-2006. I would say that the majority of the products in Asia, when it comes to when they were listed, surfaced in 2007. More than 75% of the 176 ETFs in Asia were listed in 2007. If we do not have enough products, we will not get the attention of enough investors.
What are the risks involved in investing in ETFs?
First of all, there is the risk involved in the way ETFs are structured.
There is the way of a full replication ETF, which is trying to invest in all constituents or at least to sample the constituents. They could have a problem of not being able replicate the indices or having a huge tracking error.
There is a so-called swap-based ETF, which is now around 80% of the ETFs being introduced in Europe. These follow the Ucits III rule that at least 90% of the fund should be collateralized while 10% can be invested in a swap, and with the swap you can eliminate all tracking error, give enhancement to the fund, and create innovation. So the maximum risk of a counterparty risk of that kind of an ETF is 10% of the fund.
We run our funds with a counterparty risk of 1% to 3% and usually not more than that.
Are investors asking more and different questions when they ask you about your ETFs?
It definitely has changed. Every institutional investor wants to see the fund prospectus first of all -- that has not changed. But now, investors ask more questions. The questions are not so much about the structure of the ETFs but more about the liquidity. They really want to know if they can get in and out quickly.
Who heads Deutsche Bank's db X-trackers' business here in Asia?
We have Gary Suen and he is based in Hong Kong. He is overseeing the ETF business in Asia and has been with the bank since 2004. What we do here in Asia is a complete teamwork.
What challenges do you expect in building the business in Asia?
It's more filling the supermarket of products, which is the same thing we did in Europe. We need to make sure that we have the products because if people do not want to touch equities for the next three years, we have to make sure that we also have fixed income products on the shelves. We have to find the right indices and we have to make sure that they are liquid and tradable. This is more of the challenge for us. ETFs are almost self-selling.