Risk Considerations

Investors should note that the Xtrackers ETFs & ETCs are not capital protected or guaranteed and investors in each Xtrackers ETF or ETC should be prepared and able to sustain losses up to the total capital invested. The value of an investment in an Xtrackers ETF or ETC may go down as well as up and past performance does not predict future returns. Investment in Xtrackers ETFs or ETCs involve risks. For a list of related risks please click on the Risks and Terms tab.

Capital Markets

The Capital Markets team is positioned centrally between ETF investors and the liquidity providers in Xtrackers products.
Our  aim is to maximise fund liquidity and minimise client transaction costs in Xtrackers ETFs.

Capital Markets Capabilities

ETF Trading – How are ETFs typically traded?

There are four main ways in which an ETF can be traded:

NAV Trading

What is NAV trading?

NAV trading is used to target the official NAV of an ETF and is most used by investors who are benchmarked to ETF NAV.

It is appropriate for investors who want a cost effective method of execution without time sensitivity. Brokers provide investors with fixed prices for execution, usually shown in reference to a basis point cost versus the official NAV publication e.g. NAV -2bps / +2bps. This means the broker is willing to buy the ETF at the reference NAV minus two basis points and sell the ETF at NAV plus two basis points.

NAV Trading For illustrative purposes only

OTC Risk Trading

What is OTC risk trading?

Some of the largest facilitation trades in the ETF market are conducted with the use of a broker via OTC risk trading. This involves investors asking brokers for a live price of the ETF in which they wish to trade.

Once the investor has executed their trade, the risk is then fully transferred to the broker who will need to hedge the position. Trading desks will charge a risk premium for this commitment to capital. Generally, the price shown on a risk trade will take into consideration: market impact and slippage, financing of the ETF position and implied creation redemption costs.

The diagram below illustrates how OTC risk trading would work:

OTC Risk Trading For illustrative purposes only

Exchange Trading

What is exchange trading?

Investors can also choose to trade ETFs on the global exchanges with the use of algorithms. During the course of European trading hours, designated market makers provide exchange bid and offer prices to provide liquidity to ETFs.

Investors are able to enter and exit trades at any point during the trading day.

One of the key differences between exchange and OTC risk execution is the process of achieving the final fill price. When an investor asks a broker for an OTC risk price, it is the final price they will achieve.

In the case of exchange execution the investor has various options in which they can achieve their execution but they will not know their final price at the outset.

The order book example below demonstrates the number of shares on the bid and offer of the respective prices for an ETF. Currently there are 76 shares on the offer at a price of 131.94 EUR. However, if an investor wanted to trade 100,000 shares of this product, they may not achieve all of the execution at this price. The investor’s final fill would be the weighted average of all the executions:

NAV Trading For illustrative purposes only

Agency Trading Execution

What is Agency OTC trading?

An agency order involves an investor giving an order to a broker with the agreement that the broker will execute the order and pass the execution fills back to the investor. The broker acts as an agent, simply executing the order for the client on a best efforts basis.

In order to provide this service, the broker may charge the client a commission for the execution services. There are multiple ways in which an agency order can be executed, all of which are appropriate accordingly to the underlying market conditions.

The diagram below highlights the advantages and disadvantages of agency execution:

Agency Trading Execution For illustrative purposes only


What is

What is the difference between the primary and secondary market?


The primary market is the mechanism for the creation of new ETF shares or the redemption of existing ETF shares. When investors purchase a mutual fund, the transaction is settled with a creation of new mutual fund shares. This same mechanism applies in the primary market for an ETF.

The secondary market relates to all activity in ETF trading outside of the primary market with the transacting of existing shares in issue. This can include over the counter (“OTC) trading or the on-exchange trading activity of an ETF.

The secondary market provides investors with multiple options for methods of execution with the ability to trade ETFs with live prices, but also verses the Net Asset Value, comparable to trading a mutual fund.

Xtrackers ETFs are listed across major exchanges but can also be traded off exchange via various OTC venues.



How do you measure primary market liquidity?

Primary market liquidity is a function of the average daily volume of the ETF’s underlying securities. Common practice is to measure primary market liquidity with a metric called implied liquidity.

What is implied liquidity?

The fundamental driver of ETF liquidity is based upon the liquidity of the underlying securities. ETF implied liquidity looks at how many shares of the underlying would have to be traded to represent the intended trading notional of the ETF. Subject to an investors chosen level of average daily volume (“ADV”) participation this can help determine the volume that can be traded in one day driven by the least liquid security in the trading basket. For example, the maximum amount of participation could be capped at 25% of ADV of the least liquid security, and therefore based on historical average daily volumes investors can derive the number of ETF shares that could be traded based a chosen participation level.

How do you measure secondary market liquidity?

Where implied liquidity of the underlying securities is the ultimate driver of ETF liquidity, it is important to understand that the average daily volume of the ETF itself should not be used as a stand-alone tool to assess the liquidity profile of an ETF. Breaking this down, when a creation or redemption of an ETF occurs in the primary market, it is the transacting of the underlying securities which takes place to facilitate the primary market ETF order and thus a defining metric for understanding liquidity. In addition to this, it is good practice for investors to look at other metrics when selecting ETFs such as but not limited to: ETF exchange bid offer spreads, OTC pricing and market depth.

Who are the most active market makers in specific funds?

The most active market maker(s) in a fund will vary from product to product. We recommend to contact the Capital Markets Desk to connect you with the most active market maker(s) for your specific order.

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