Q&A on db X-trackers physical ETFs

  • Why are the Changes taking place?

    Some investors prefer products with a direct investment policy (also known as physical replication), and we aim to meet that demand by implementing the Changes. We expect that investors will be receptive towards the Changes.

  • When will the Changes happen?

    It is intended that a total of 10 ETFs will change from their current indirect investment policy (also known as synthetic replication) to a direct investment policy. This is to meet investors' demands in terms of providing products which do not use swaps or derivatives as their investment policies to replicate the performance of an index.

    It is intended that the Changes will take effect between 7July 2014 to 31 December 2014, such that, by 1 January 2015 at the latest, all 10 ETFs will be adopting a direct investment policy.

    After a Change has been completed for an ETF:

    • an announcement will be published on our ETF website and the website of Hong Kong Exchanges and Clearing Limited;
    • the description of the ETF on our website will be updated;
    • the updated offering documents will be available on our ETF website; and
    • the marker “X” will be subsequently removed from the stock short name of the relevant ETF.
  • Why were these 10 ETFs selected for the Change?

    The 10 ETFs were selected as a part of our broader strategy in response to global investor demand for ETFs that adopt a direct replication approach.

  • Will investors be immediately or subsequently impacted by potential costs?

    Any immediate administrative or legal costs associated with implementing the Changes shall not impact the performance of the ETFs. Such costs will not be borne by the ETFs and/or their investors.

    However, following the Change, the ongoing performance of a direct replication ETF can be impacted by stamp duties and financial transaction taxes associated with the trading of physical securities.

  • Does the Change in investment policy require investors to take specific action?

    The Change does not require specific action by investors who wish to continue their investment. Investors should note that their exposures, the stock exchanges on which the ETFs are listed as well as countries where the ETFs are registered for sale will remain unchanged.

    The ETF will track the same index after a Change has been completed. The Change only relates to the strategy used by the ETF to passively track the index, such that after a Change, the ETF will track the index by buying index constituents or related securities rather than by using swaps.

    Investors should refer to the offering documents of the ETFs and our website for further information before making any investment decisions.

  • Will these 10 ETFs engage in securities lending and how will this affect the counterparty risk which the ETFs are exposed to (if any)?

    After the Change, the 10 ETFs may enter into securities lending transactions for up to 30% of its net asset value at any one time to generate additional income and to offset part or all of its costs. The ETF will receive 70% of the associated revenue generated by such securities lending transactions and the remaining 30% will be split between the Securities Lending Agent and the Management Company.

    Securities lending may lead to counterparty risk if the borrower fails to return the securities in a timely manner or at all. This risk is managed by using collateral arrangements as well as restricting the maximum value of securities that will be lent at any point in time to 30% of the ETF’s total net asset value. In addition, indemnification is provided by Deutsche Bank AG in the event of an act of insolvency in respect of a borrower.

    For more details, please refer to the offering documents of the ETFs and the relevant information available on our website.

  • What are the collateral arrangements for securities lending?

    The value of collateral received for securities lending transactions must be equal to at least 100% of the global valuation of the securities lent (interests, dividends and other eventual rights included) and will be marked-to-market on a daily basis.

    Eligible collateral is subject to applicable rules and regulations under the UCITS Directive. The collateral is subject to a prudent collateral management policy in respect of, amongst others, margin (i.e. the collateral amount is required to be 100% to 110% of the exposure to provide an additional buffer) and concentration limits.

  • How transparent are physical ETFs and securities lending?

    We will publish the breakdown of the current holdings of the direct replication ETFs on our website on a daily basis. For ETFs that will engage in securities lending, the full breakdown of securities held as collateral, the percentage of securities on loan, the list of potential borrowers, the net return received from such securities lending transactions as well as other important details will also be available on our website.

  • Does this mean that Deutsche AWM does not believe in synthetic ETFs anymore?

    No. Synthetic replication ETFs will remain a core part of our product range.

    Certain markets or asset classes can only be efficiently accessed by using synthetic replication (e.g. difficult-to-access equity markets of emerging or frontier countries.) Where there are advantages or benefits to investors in using synthetic replication, we will continue to maintain such products and will aim to launch new ones in the future.

  • Who is mandated with the portfolio management of the physical ETFs?

    We will continue to engage the experienced portfolio management team from State Street Global Advisors (SSGA) as our investment manager for the direct replication ETFs launched from our Luxembourg platforms. This independent set-up is consistent throughout our range of Luxembourg based direct and indirect replication ETFs and has proved to work effectively and successfully.

Important: Investors should not make investment decisions based only on this document.

  • db x-trackers* (*This includes synthetic ETFs) is an umbrella fund with a series of different sub-funds (each a “Sub-Fund”) which are exchange-traded funds (“ETFs”) tracking different underlying indices with different risk profiles.
  • The shares of the Sub-Funds which invest in a single country or sector are likely to be more volatile than a broad-based fund as it is more susceptible to fluctuations in value resulting from adverse conditions in that single country or sector.
  • The shares of the Sub-Funds may trade at a discount or premium to their net asset value (“NAV”).
  • An investment in the shares of the Sub-Funds may directly or indirectly involve exchange rate risk.
  • Investment involves risks. The Sub-Funds may not be suitable for all investors. Prospective investors should carefully read the Hong Kong Prospectus for further details on product features and risks, and should consider seeking independent professional advice in making their assessment.

Indirect Replication Funds

  • Certain Sub-Funds adopt an indirect investment policy (also known as “synthetic replication”) (each an “Indirect Replication Fund”) by investing in swap transaction(s), which is a financial derivative instrument, linked to an underlying index. Currently, Deutsche Bank AG (“DB”) is the only swap counterparty of all Indirect Replication Funds. Investors in an Indirect Replication Fund are therefore subject to the counterparty and credit risk of DB.
  • Each Indirect Replication Fund either puts in place a collateral arrangement where collateral securities are pledged in favour of such Indirect Replication Fund or invests in a portfolio of securities (“invested assets”), both with a view to ensure that the net exposure of such Indirect Replication Fund to DB is limited to no more than 0% of its NAV at the end of a trading day. The collateral securities and invested assets generally are not constituents of the underlying index. These arrangements are subject to risks, including failure on the part of DB to fulfil its obligations under the swap or collateral arrangements, a substantial drop in market value of the invested assets or collateral securities, settlement risk, or the insolvency or default of DB.
  • Insolvency or default of DB may lead to dealing in the shares of the Indirect Replication Funds being suspended, and the Indirect Replication Funds may suffer significant losses and may even be terminated.
  • Both the management company and the swap counterparty of the Indirect Replication Funds belong to DB Group. Furthermore, DB acts as swap counterparty and swap calculation agent in respect of all the Indirect Replication Funds to which the Hong Kong Prospectus relates. DB is also the Index Sponsor for the underlying indices of some of the Indirect Replication Funds. All of these may give rise to potential conflicts of interest.

Direct Replication Funds

  • Certain Sub-Funds adopt a direct investment policy (each a “Direct Replication Fund”) by directly investing in a portfolio of transferable securities that may comprise all or a substantial number of the constituents of the relevant underlying index broadly in proportion to the respective weightings of the constituents, or other eligible assets.
  • A Direct Replication Fund may utilise financial derivative instruments (“FDIs”) for investment and/or hedging purposes. The use of derivatives exposes a Direct Replication Fund to additional risks, including volatility risk, leverage risk, liquidity risk, correlation risk, counterparty risk, legal risks and settlement risks.
  • Due to various factors, including fees, legal or regulatory restrictions and certain securities being illiquid, it may not be practicable to purchase all of the constituents in proportion to their weighting in the underlying index. A Direct Replication Fund will be subject to a greater tracking error in such circumstances.
  • A Direct Replication Fund entering into a securities lending transaction is subject to counterparty risk, collateral risk, limited nature of indemnity from securities lending agent risk, operational risk and conflicts of interests risk.

Emerging market ETFs

  • The investment objective of certain Sub-Funds is to track the performance of certain emerging markets and as such, the Sub-Funds 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.

Disclaimer

Investment involves risks. Past performance is not indicative of future results. The above information is for general reference only. Before making any investment decision, investors should understand the details of the investment and to consult an independent financial adviser.

This document has not been reviewed by the Securities and Futures Commission of Hong Kong. This document is issued by Deutsche Bank AG acting through its Hong Kong Branch and may not be reproduced, distributed or transmitted to any person without express prior permission.

The distribution of this document and availability of these products and services in certain jurisdictions may be restricted by law. This document is intended for discussion purposes only and does not create any legally binding obligations on the part of Deutsche Bank AG and/or its affiliates (“DB”). Without limitation, this document does not constitute an offer, an invitation to offer or a recommendation to enter into any transaction. Investors should read the offering documents for further details, including the risk factors, before investing. DB is not acting as your financial adviser or in any other fiduciary capacity with respect to this proposed transaction. The transaction(s) or products(s) mentioned herein may not be appropriate for all investors and before entering into any transaction you should take steps to ensure that you fully understand the transaction and have made an independent assessment of the appropriateness of the transaction in the light of your own objectives and circumstances, including the possible risks and benefits of entering into such transaction. You should also consider seeking advice from your own advisers in making this assessment. If you decide to enter into a transaction with DB, you do so in reliance on your own judgment.

A complete description of each db x-trackers* ETF(*This includes synthetic ETFs) listed on The Stock Exchange of Hong Kong Limited is included in the latest version of the Hong Kong Prospectus issued by db x-trackers*(*This includes synthetic ETFs). Copies of the Hong Kong Prospectus and the semi-annual and annual reports are available at www.etf.db.com/hk and may be obtained from the registered office of db x-trackers*(*This includes synthetic ETFs), located at 49, avenue J.F. Kennedy, L-1855 Luxembourg, R.C.S. Luxembourg B-119 899, or at the registered office of the Hong Kong Representative (RBC Investor Services Trust Hong Kong Limited) located at 51/F, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong. Alternatively, prospective investors may contact Deutsche Bank AG, Hong Kong Branch, Level 52, International Commerce Centre, 1 Austin Road West Kowloon, Hong Kong SAR – China (Hotline: +852 2203 6886, e-mail: info.dbx-trackers@db.com.)

Securities Lending Policy

Download
(PDF)

Press Release

Download
(PDF)

Investor Notice

Download