FAQ ETFs

Exchange traded funds (ETFs) are open ended, regulated, mutual funds that are listed on stock exchanges and designed to track the performance of an underlying index. ETFs combine the advantages of stocks (tradability and liquidity) and index funds (low costs, diversification and regulated infrastructure) in a single product. ETFs have the advantage that they can be traded intra-day on the stock exchange in the same way as any other security listed on a stock exchange. In one simple transaction it is possible to get exposure to a diversified index of securities.

Through ETFs it is possible to get exposure to a wide variety of equity markets (e.g, developed and emerging markets, or specific equity sectors), exposure to other asset classes  such as government bonds, corporate bonds, commodities, as well as strategies such as ‘strategic beta’/factor exposure, and themes such as ESG (environmental, social and corporate governance). ETF shares are a flexible investment tool that can be traded in small and large sizes.

An underlying index refers to the index that a particular Xtrackers ETF is seeking to track. For example, the underlying index of the Xtrackers MSCI Taiwan UCITS ETF is the MSCI Total Return Net Taiwan Index^[1]. Underlying indices are maintained and independently calculated by major index providers such as Standard & Poor’s, Morgan Stanley Capital International, Inc. and FTSE International Limited, as well as investment banks, stock exchanges and data vendors, and are diversified indices widely accepted as representative of a region, country or sector by financial market participants.

Tracking error (typically quoted annualized) is the technical term used by investment professionals to refer to the annualized volatility of the difference between the daily performance of an ETF and the daily performance of its underlying index. You can also think of the tracking error as a measure of the accuracy with which an ETF achieves its investment objective, which is tracking the underlying index. The lower the tracking error, the closer the performance of the ETF is to that of the underlying index. The tracking error is generally influenced by a number of factors, including the total expense ratio of the ETF, transaction costs, withholding tax and stamp duty incurred upon transacting the assets of the ETF, and the liquidity of the assets of the ETF and the constituents of the Index.

ETFs are unusual in that the same investment instrument can be used by both retail and institutional investors. There is no separate share class for institutional investors with a lower fee structure (as is normally the case for traditional mutual funds). All investors get the same product at the same price/cost. ETFs are embraced by self-directed retail investors who recognise the benefits of a liquid, transparent and convenient investment tool that can be used to diversify their investment portfolio in a cost-efficient manner.

ETFs offer a broader allocation universe than most other stock exchange traded synthetic index products such as futures. For example, there are ETFs available on:

• Developed markets – UK, USA, Europe, Japan
• Emerging markets – regional and individual countries like India, China and Brazil
• Style – value/minimum volatility, small/mid cap
• Fixed income – Government and corporate bond indices
• ESG – equity and fixed income environmental, social and corporate governance
• CDS – credit default swap indices
• Money market – overnight money market rates for major currencies like euro, US dollar, pound sterling
• Commodities – diversified indices covering a range of commodities
• Themes – like artificial intelligence and big data
• Alternative index strategies – fundamental and dividend strategy indices. Also short or leveraged exposure.

The development of funds-of-ETFs and pensions and savings plans (which include ETFs) will further increase the penetration of ETFs among retail investors.

ETFs are unusual in that the same investment instrument can be used by both retail and institutional investors. There is no separate share class for institutional investors with a lower fee structure (as is normally the case for traditional mutual funds). All investors get the same product at the same price/cost. Recently, the investment emphasis has shifted from return vs risk to benefit vs cost. It is generally accepted that passive instruments such as ETFs can help reduce costs and enhance returns in portfolios. However, in addition to being useful as the ‘core’ in a core satellite asset allocation strategy, ETFs can also be used as part of a ‘portable beta’ strategy. With traditional active fund management becoming more commoditised, the search for ‘alpha’ is becoming more difficult. Instead, the beta component can be actively managed to generate alpha. ETFs provide the perfect tool kit of beta products to do this. Portable beta strategies are often a better alternative to portable alpha strategies as they are cheaper to implement, more transparent and scalable. Pure alpha is not scalable without subjecting the portfolio to higher risks. As ETF shares can be traded intraday and are transparent, they are a highly flexible investment tool for achieving index exposure on both a long and short term basis. Institutional investors, such as pension funds, can use ETFs as:

• A short term cash flow management tool, to reduce cash drag
• An asset allocation building block – both on a tactical and strategic basis
• A way to gain exposure to new markets and alternative asset classes
• A core investment in core-satellite strategies
• An alternative to OTC derivatives - an efficient means to structure long/short strategies
• A hedging tool
• A trading tool
• A transition management tool

The advantages of ETFs versus other index tracking alternatives available to institutional investors and asset managers are set out below: 

• Swaps – with ETFs there is no need for any documentation or infrastructure set up in order to trade ETF shares. Also, a swap is a bespoke product which is traded with one counterparty whereas ETF shares can be traded freely on the stock exchange.
• Futures – with ETFs there is no need for margin accounts and none of the roll costs associated with futures on expiry. ETFs are more efficient and stable at tracking broad underlying indices such as global or regional indices as multiple futures contracts are not required. ETF shares can be traded in smaller or more precise volumes as they do not have any minimum contract sizes.
• Mutual funds / Index funds – ETF shares can be traded intra-day and generally have lower management fees than mutual funds / index funds.
• Certificates/Notes – ETFs are regulated investment funds and investors do not face any credit exposure issues. Unlike many certificates/notes, the returns of ETFs include dividend distributions (either distributed or reinvested).

The trading price of an ETF is a secondary market price formed on a stock exchange by interactions between buyers and sellers. As such, it is influenced by factors such as the scarcity of the offer relative to the demand. If the offer for shares of an ETF exceeds the demand, it will drive traded prices down (and reciprocally). However, under normal market conditions, the trading price of an ETF should stay relatively close to the iNAV, and should be close to the NAV for that day at the end of the trading session, due to the open-ended nature of ETFs, which allows for sufficient shares to be created on each trading day. Time-zone factors also influence the trading price of ETFs. For example, an ETF tracking an underlying index for which the main market is closed during part of the trading day on the stock exchange where such an ETF is listed will have a tendency to diverge more from its iNAV than if the underlying index was trading simultaneously.

The iNAV refers to the intra-day indicative Net Asset Value of an ETF and is a measure of the estimated fair value of an ETF at any point in time during the trading day. iNAVs are published by market makers or other data providers on a continuous basis throughout the trading day and can be used by investors in comparison to the trading price of an ETF to determine whether an ETF is trading at a premium (i.e. is trading above its iNAV) or at a discount (i.e. below its iNAV).

Xtrackers is one of the most established ETF providers in Europe. With over €90 billion in assets under management (as at June 15, 2020)^[2], Xtrackers ranks as the second largest ETF provider in Europe and the fifth largest in the world. Xtrackers offers over 170 ETFs on various asset classes, including equity, fixed income, money market, currencies and commodities, letting investors implement a wide range of market strategies in a transparent, flexible and efficient way.

Xtrackers ETFs are listed on a number of stock exchanges across Europe (the Borsa Italiana Frankfurt Xetra, Euronext Paris, London Stock Exchange, and the Zurich SIX Swiss Exchange) and two in Asia (the Singapore Exchange and Hong Kong Stock Exchange), and are supported by a range of market makers.

Xtrackers ETFs are sub-funds of umbrella fund investment companies domiciled in Luxembourg and Ireland, and organised as, respectively, SICAV (“Société d’Investissement à CApital Variable”, which translates as investment company with variable capital) and PLC (public limited company). The platforms and their sub-funds comply with the relevant European fund regulations relating to undertakings for collective investment in transferable securities (UCITS).

Similar to traditional index tracking funds, Xtrackers ETFs aim to track the performance of an underlying index. For example, the Xtrackers MSCI Taiwan UCITS ETF seeks to track the performance of the MSCI Total Return Net Taiwan Index^[1].

Xtrackers ETFs are index tracking funds and seek to replicate the performance of their respective underlying indices using either direct replication – also known as direct, physical replication – or indirect replication, which is also referred to as synthetic or swap-based replication.

Indirect replication involves the ETF provider entering an agreement with one or several swap counterparties to provide the returns of the index being tracked. With direct replication products, the fund invests directly in all or a subset of the securities that constitute the index.

Xtrackers ETFs are designed to closely track the performance of their respective underlying indices. As such, and unlike discretionary managed funds, they will not seek to reduce their exposure to their respective underlying indices in adverse market conditions. Investors should therefore expect the performance of Xtrackers ETFs to be in line with the underlying indices in falling markets as well as in rising markets.

Xtrackers ETFs are index tracking funds, and therefore aim to closely track the performance of their respective underlying indices. However, in some cases enhancements from securities lending or dividend optimisation may be passed on to the ETF, thereby offsetting some of the tracking error generated by the total expense ratio (or all-in fee) of the ETF.

Xtrackers ETFs have capitalizing or distributing share classes. Profits are typically distributed once a year. Capitalizing share classes track total return indices and therefore assume the dividends paid by the underlying index constituents are reinvested in the respective underlying indices, and are therefore reflected in the share price of the relevant Xtrackers ETFs rather than distributed. Investors can select distributing of capitalizing share classes in the ETF product selection menu under ”Distribution Policy”.

With Xtrackers ETFs it is possible to achieve exposure to a diversified portfolio of securities in one instant transaction in the same way as trading any other security listed on a stock exchange.  The key benefits of Xtrackers ETFs can be summarised in three words – efficient, transparent, flexible.

Efficient

• Low Fees – Xtrackers ETFs are passive index tracking instruments with low annual management fees and total expense ratios (“TERs”) compared to traditional fund products.
• Low Tracking Error – Xtrackers ETFs are designed to closely track their respective underlying indices through either direct or indirect replication strategies.

Transparent 

• Continuous Pricing – Xtrackers ETFs trade on a stock exchange with various market maker(s) providing liquidity during exchange trading hours.
• iNAV – the intra-day price of Xtrackers ETFs can be followed through the iNAV (indicative Net Asset Value) which is calculated and disseminated regularly during exchange trading hours via Reuters or the respective exchange websites.

Flexible

• Intra-day Trading – Xtrackers ETFs can be bought or sold on the stock exchange during normal trading hours in the same way as any exchange-listed security
• Trading Size Flexibility – unlike other instruments such as futures, Xtrackers ETFs can be traded in small lot sizes.
• Multiple Investment Applications – Xtrackers ETFs can be used by investors for a variety of investment strategies, ranging from using them as an intra-day trading tool to forming the basis of long-term asset allocation decisions.

Please note that the risk factors set out below are not exhaustive. Prospective investors should refer to the relevant section of the prospectus for more information on risk factors.

• Xtrackers ETFs are linked to indices which can perform positively or negatively. As a result, the value of an investment in Xtrackers ETFs can rise or fall. The net asset value or traded price of the shares of Xtrackers ETFs can at any time fall below the price at which the investor purchased them. This can result in losses, up to and including a total loss of the amount initially invested.
• Shares of Xtrackers ETFs are denominated in various currencies which can differ from the local currency of the investor. In addition, the currency in which the Funds’ shares are traded on SGX-ST may differ from the currency in which the shares of Xtrackers ETFs are denominated. In such case, or if the local currency of the investor is different from the currency in which the shares are denominated, exchange rate fluctuations could negatively impact the value or the return of an investment in the shares.
• The value of the shares of Xtrackers ETFs can be influenced by market volatility and/or volatility of the index and/or other assets of such Xtrackers ETFs.
• Under certain circumstances, the returns on the shares of Xtrackers ETFs may not be directly comparable to the returns achieved by an investment in the constituents of the underlying index of the relevant Xtrackers ETF.
• As Xtrackers must comply with the respective regulatory restrictions and changes in law, which may affect it, its shares or the investment restrictions, a change of investment objective and policy of an Xtrackers ETF may be necessary. The index and/or other assets of Xtrackers ETFs and the derivative techniques for linking them can also be subject to changes in laws and regulations and/or regulatory restrictions, which can detrimentally impact their value.
• Xtrackers ETFs may be partially or totally exposed to financial derivative transactions. As a result, investors will bear the counterparty risk exposure arising from such derivative transactions. If any counterparty fails to perform its obligations under the derivative transactions, the relevant Xtrackers ETFs may suffer losses and their ability to achieve their investment objective may be impaired. In the event of any default by a counterparty, dealings in the shares of Xtrackers ETFs may be suspended and such Xtrackers ETF may not continue to trade.
• The prices of Xtrackers ETFs on exchange are based on secondary market factors and may deviate significantly from the net asset value of the relevant Xtrackers ETF. The fact that Xtrackers ETFs are listed on various exchanges in Europe and Asia is not an assurance of liquidity.
• Investing in short ETFs may not be suitable as a long term investment. In particular, ETFs tracking short indices exhibit a phenomenon known as “path dependency”, which refers to the fact that, when performance is observed over periods of time longer than a day, the point-to-point performance of a short index may not be symmetrical to the point-to-point performance of the corresponding long index over the same period of time. This phenomenon is accentuated if the long index is volatile.
• The investment objective of certain Xtrackers ETFs is to track the performance of certain emerging markets. Generally, investments in emerging markets are subject to a greater risk of loss than investments in a developed market due to, among other factors, greater political, economic, foreign exchange, liquidity and regulatory risks. Xtrackers ETFs are linked to indices which can perform positively or negatively. As a result, the value of an investment in Xtrackers ETFs can rise or fall. The net asset value or traded price of the shares of Xtrackers ETFs can at any time fall below the price at which the investor purchased them. This can result in losses, up to and including a total loss of the amount initially invested.
• Shares of Xtrackers ETFs are denominated in various currencies which can differ from the local currency of the investor. In addition, the currency in which the Funds’ shares are traded on SGX-ST may differ from the currency in which the shares of Xtrackers ETFs are denominated. In such cases, or if the local currency of the investor is different from the currency in which the shares are denominated, exchange rate fluctuations could negatively impact the value or the return of an investment in the shares.
• The investment objective of certain Xtrackers ETFs is to track the performance of certain emerging markets. Generally, investments in emerging markets are subject to a greater risk of loss than investments in a developed market due to, among other factors, greater political, economic, foreign exchange, liquidity and regulatory risks.

Like actively managed funds and traditional index tracking funds, Xtrackers ETFs charge fees and expenses which are calculated and accrued daily on the NAV of the ETF.

The annual management fees on Xtrackers ETFs are very competitive and relatively low compared with management fees applied to actively managed funds. The annual management fees on Xtrackers ETFs generally range from 0.07% per annum on ETFs tracking the most liquid long underlying indices (such as the MSCI Total Return Net USA Index^[1]) to 0.85% per annum for ETFs tracking emerging market underlying indices.

In addition to the management fee, Xtrackers ETFs have a fixed fee generally not exceeding 0.20% per annum. The sum of the management fee and the fixed fee is referred to as the all-in fee, or total expense ratio (“TER”) of the ETF.

Other than normal trading commissions that would be charged by brokers for buying/selling ETF shares, in most cases there are no other charges associated with buying/selling Xtrackers ETF shares.

Xtrackers is an open-ended investment company and as such, shares of the Xtrackers ETFs can be created and redeemed with the management company on a daily basis. However, for reasons of operational efficiency and costs management, investors cannot apply to create or redeem shares of Xtrackers ETFs directly with the management company. Xtrackers, as with most ETF providers in the market, has restricted the creation and redemption of shares to selected partners acting as market maker or authorized participant in respect of its ETFs. Please refer to “How can investors trade shares of Xtrackers ETFs” below for easy ways of investing into Xtrackers ETFs.

Major investment banks as well as specialist trading houses are involved in the market making and trading of ETFs across the world, thus acting as providers of liquidity for such products.

Xtrackers is an open-ended investment company and as such, shares of the Xtrackers ETFs can be created and redeemed by markets makers and authorized participants with the management company on a daily basis. This has advantages for secondary market trading as prices are close to fair value and it facilitates trading in larger sizes without market impact on the traded price of the shares of Xtrackers ETFs.

This means that on any day, markets makers and authorized participants will have the capacity to create sufficient shares to meet the settlement requirements resulting from their trading activity on the stock exchange on that day.

The open-ended feature of Xtrackers ETFs ensures that any premium or discount on the secondary market (i.e. on the stock exchange) to the fair value of the ETF can be corrected through the activities of the market makers who are able to subscribe for or redeem ETF shares in the primary market (i.e. directly with the management company).

The subscription/redemption by market makers is done in large sizes (typically EUR 2 million plus). The liquidity of an ETF is measured by the liquidity of the constituents of its underlying index rather than the trading volume on the stock exchange.

Like most mutual funds, the NAV of Xtrackers ETFs is calculated daily and equals the sum of the ETF’s assets minus the ETF’s liabilities, both valued by reference to the close of market prices on the day as of which such NAV is calculated. As such, the NAV of an ETF is essentially affected by the value of the underlying portfolio of assets of the ETF and the performance of the underlying index. The NAV per share is obtained by further dividing the resulting figure by the number of outstanding shares of the ETF on that day. The NAV of Xtrackers ETFs is published daily on www.xtrackers.com.

Xtrackers ETFs may be exposed to a maximum of 10% net counterparty risk exposure on all transactions to a single counterparty (including derivative transactions), in accordance with UCITS investment restrictions.

Indirect replication Xtrackers ETFs use swap counterparties to acquire index exposure. A swap counterparty is an investment bank that issues swap derivative contracts. The Xtrackers ETF portfolio management team, using an ‘open architecture’ system, vets swap counterparties, with the most competitive swap agreements entered into in the interests of the ETF. Swap counterparty details, including the current swap counterparty gross exposure(s), can be found in the ‘Swap counterparties’ section of particular Xtrackers ETF webpages at www.xtrackers.com.

Also note that the European Market Infrastructure Regulation (EMIR) requires certain EU counterparties, including UCITS funds, to put in place risk mitigation procedures prior to entering into OTC derivatives trades. This regulation obliges both parties to a swap transaction to exchange collateral in order to reduce any counterparty exposure to zero. This regulation obliges both parties to a swap transaction to exchange collateral in order to reduce any counterparty exposure to zero allowing for a minimum transfer amount of €500,000 (or currency equivalent).

The relatively cheap transaction and running costs of ETFs compared with traditional mutual funds has contributed to widespread recognition that ETFs are cost-efficient investment vehicles for long-term investment. As shares of Xtrackers ETFs can be traded intra-day, they are also a highly flexible investment tool for achieving index exposure on a short term basis.

Xtrackers ETFs giving exposure to short indices may not be suitable as long-term investments, and are mostly used by retail investors for short-term hedging strategies, as well as for trading strategies by institutional investors.

The investor typically invests in the currencies of the securities in the underlying index by buying an Xtrackers ETF. For example, the currency exposure for a EUR investor buying the MSCI Japan TRN index ETF where the fund currency is USD, is still EUR / JPY. The actual currency exposure is independent of the fund currency (USD) or the trading currency (e.g. EUR). The fund and trading currencies are solely the accounting currencies and do not have a direct influence on the performance of the ETF. An exception are share classes that incorporate a currency hedge strategy. These ETFs usually carry the expression “hedged” in their name, or the index description contains a note about the currency strategies employed.

Xtrackers ETFs are traded like stocks on public exchanges and can be identified by a unique stock code. For example, the Xtrackers Euro Stoxx 50 UCITS ETF trades on various European exchanges under ISIN code LU0380865021.

As shares of Xtrackers ETFs can be traded intra-day and are transparent, they are a highly flexible investment tool for gaining market exposure on both a long and short-term basis. Shares of Xtrackers ETFs can be traded easily via your bank or broker. They trade and settle through the local clearing system the same as any other security listed on a stock exchange. There is no set up documentation or specific infrastructure required to trade shares of Xtrackers ETFs.

The taxation of investors’ holdings in shares of Xtrackers ETFs will vary according to the country of domicile and residence of the investor, the type of investor (e.g. insurance company, pension fund or retail investor), the country of domicile of Xtrackers (Luxembourg) and whether the investor complies with any local, regulatory or tax reporting obligations. Neither Xtrackers, DWS Investment S.A., DWS Investments UK Limited, nor any of their parents or affiliates offer tax advice. Prospective investors are invited to consult their own independent tax advisors if they are in doubt about their tax situation and the implications for them of investing into (or disposing of) shares of Xtrackers ETFs.

Like stocks, Xtrackers ETFs are traded publicly on stock exchanges and can therefore be bought by any retail investor. UCITS structured Xtrackers ETFs (ie, Luxembourg or Ireland domiciled Xtrackers ETFs) are not available to US persons. Before investing in any Xtrackers ETF, prospective investors are recommended to seek independent professional advice on their status under US Securities Law.

A complete description of the relevant ETF is included in the latest version of the prospectus issued by Xtrackers, Xtrackers II and Xtrackers (IE) plc. Copies of the prospectus, Key Investor Information Document and the semi-annual and annual reports are available at www.Xtrackers.com or by contacting DWS Investments UK Limited, Winchester House, 1 Great Winchester Street, London EC2N 2DB, or DWS Investment S.A., management company of Xtrackers, Xtrackers II and Xtrackers (IE) plc, 49, avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg.

Xtrackers is one of the most established ETF providers in Europe. With over €90 billion in assets under management (as at June 15, 2020)^[2], Xtrackers ranks as the second largest ETF provider in Europe and the fifth largest in the world. Xtrackers offers over 170 ETFs on various asset classes, including equity, fixed income, money market, currencies and commodities, letting investors implement a wide range of market strategies in a transparent, flexible and efficient way.

Xtrackers ETFs are listed on a number of stock exchanges across Europe (the Borsa Italiana Frankfurt Xetra, Euronext Paris, London Stock Exchange, and the Zurich SIX Swiss Exchange) and two in Asia (the Singapore Exchange and Hong Kong Stock Exchange), and are supported by a range of market makers.

Like stocks, Xtrackers ETFs are traded publicly on stock exchanges and can therefore be bought by any retail investor. UCITS structured Xtrackers ETFs (ie, Luxembourg or Ireland domiciled Xtrackers ETFs) are not available to US persons. Before investing in any Xtrackers ETF, prospective investors are recommended to seek independent professional advice on their status under US Securities Law.

With Xtrackers ETFs it is possible to achieve exposure to a diversified portfolio of securities in one instant transaction in the same way as trading any other security listed on a stock exchange.  The key benefits of Xtrackers ETFs can be summarised in three words – efficient, transparent, flexible.

Efficient

• Low Fees – Xtrackers ETFs are passive index tracking instruments with low annual management fees and total expense ratios (“TERs”) compared to traditional fund products.
• Low Tracking Error – Xtrackers ETFs are designed to closely track their respective underlying indices through either direct or indirect replication strategies.

Transparent 

• Continuous Pricing – Xtrackers ETFs trade on a stock exchange with various market maker(s) providing liquidity during exchange trading hours.
• iNAV – the intra-day price of Xtrackers ETFs can be followed through the iNAV (indicative Net Asset Value) which is calculated and disseminated regularly during exchange trading hours via Reuters or the respective exchange websites.

Flexible

• Intra-day Trading – Xtrackers ETFs can be bought or sold on the stock exchange during normal trading hours in the same way as any exchange-listed security
• Trading Size Flexibility – unlike other instruments such as futures, Xtrackers ETFs can be traded in small lot sizes.
• Multiple Investment Applications – Xtrackers ETFs can be used by investors for a variety of investment strategies, ranging from using them as an intra-day trading tool to forming the basis of long-term asset allocation decisions.