That is right, Deutsche Asset Management seems to be pulling many of its ETFs out of Singapore. It has delisted and will be delisting a large number of its db x-trackers ETFs from the SGX.
|db x-trackers DB COMMODITY BOOSTER BLOOMBERG UCITS ETF||12-Jul-16|
|db x-trackers DB COMMODITY BOOSTER LIGHT ENERGY BENCHMARK UCITS ETF||12-Jul-16|
|db x-trackers DBLCI – OY BALANCED UCITS ETF||12-Jul-16|
|db x-trackers II MARKIT IBOXX ABF KOREA GOVERNMENT UCITS ETF||27-Mar-17|
|db x-trackers II MARKIT IBOXX ABF INDONESIA GOVERNMENT UCITS ETF||27-Mar-17|
|db x-trackers II SINGAPORE DOLLAR CASH UCITS ETF||27-Mar-17|
|db x-trackers II AUSTRALIAN DOLLAR CASH UCITS ETF||12-Jul-17|
|db x-trackers MSCI Emerging Markets Index UCITS ETF||24-Aug-17|
|db x-trackers MSCI EM Asia Index UCITS ETF||24-Aug-17|
|db x-trackers MSCI AC Asia Ex Japan High Dividend Yield Index UCITS ETF||24-Aug-17|
|db x-trackers MSCI AC Asia Pacific Ex Japan Index UCITS ETF||24-Aug-17|
I am not surprised that many of these ETFs are closing down. Here are some reasons why:
Reason 1: Some of these ETFs are of no meaning and should not even exists. For example, consider db x-trackers II SINGAPORE DOLLAR CASH UCITS ETF and db x-trackers II AUSTRALIAN DOLLAR CASH UCITS ETF: why would anyone wants to buy an ETF that just put its money in cash and subject to brokerage fees? Perhaps someone at the product design department wanted to score points by manufacturing many products - nevermind they were completely useless.
Reason 2: Another reason why these ETFs are getting delisted is due to the lack of interest. Majority of these ETFs have no liquidity at all. For example, prior to 12 June 2017 announcement that db x-trackers MSCI Emerging Markets Index UCITS ETF was going to be delisted, 13 out of 23 days prior to that date had ZERO trade volume. On the other hand, from 12 June 2017 to 30 June 2017, only 4 out of 14 days had no trade because people are dumping their ETF shares before it gets delisted. In fact, volume went up due to this reason.
Reason 3: The third reason why these ETFs may have got delisted is due to the very small fund size. The fund size for db x-trackers MSCI AC Asia Pacific Ex Japan Index UCITS ETF and db x-trackers MSCI AC Asia Ex Japan High Dividend Yield Index UCITS ETF were just USD 1.7 million and USD 7.6 million respectively as at 31 May 2017. Majority of my clients have many times higher networth than this! But strangely, db x-trackers MSCI EM Asia Index UCITS ETF has a fund size of whopping USD 666 million and yet it’s getting delisted.
Reason 4: One of the reason for the lack of interest is due to the db x-trackers horrible tracking error. Consider db x-trackers MSCI Emerging Markets Index UCITS ETF 2C. Its 7 years return as at 30 June 2017 was 2.86% per annum. The MSCI Emerging Market ETF total return was 3.66% over the same period in SGD. Hence, the db x-trackers MSCI Emerging Markets Index UCITS ETF 2C tracking error was 3.66-2.86 = 0.80% per annum. This is despite the fact that the “All-in-fee” was 0.49% pa. Although it has a fund size of a whopping USD 1.9 billion as at 31 May 2017, it seems it has no economy of scale.
Reason 5: Hidden cost. Is the lack of economy of scale the reason for its poor tracking error? Perhaps not. According to the factsheet fineprints which are so small that I had to rely on the zoom function of my PDF reader to magnify the fonts, it says:
Investors should note that the All-In Fee does not cover any OTC Swap Transaction Costs, which are embedded in the OTC Swap Transaction of the ETF. OTC Swap Transaction Costs are index replication costs incurred by the Swap Counterparty and may impact the performance of the ETF negatively relative to the underlying index.
This brings me to the final reason why these ETFs are completely not interesting:
Reason 6: Many of these ETFs are swap based. They do not invest in the underlying securities. Instead, the fund is invested in a swap with Deutsche Bank. Here is what the factsheet says:
The Fund will enter into a derivative with a counterparty (initially Deutsche Bank). If the counterparty fails to make payments (for example, it becomes insolvent) this may result in your investment suffering a loss.
It must be noted that this counterparty risk does not come with an associated risk premium. In layman terms, it means that investors are not going to get rewarded for the extra risk. Without an associated risk premium, why would anyone bother to take on this extra risk?
Why would an investor invest in a swap based ETF?
In Singapore context, the alternative in not investing in swap based ETF is to buy active managed funds. But my research has shown that active managed funds normally do not do well compared to ETFs. Here is a table to show the 7 years returns ending 30 June 2017:
|Fund Name||Annualized Return SGD||Tracking error per annum|
|MSCI Emerging Market Index||3.66%||0.00%|
|Vanguard - Emerging Markets Stock Index Inst||3.32%||0.34%|
|db x-trackers MSCI Emerging Markets Index UCITS ETF 2C||2.86%||0.80%|
|Average active managed emerging market equity (retail funds)||1.37%||2.29%|
You can see that although db x-trackers MSCI Emerging Markets Index UCITS ETF 2C has a tracking error of 0.80%, the average return of an active managed emerging market unit trust has a whopping tracking error of 2.29%! To put it another way round, those who invest in an active managed emerging market fund tends to lose 2.29-0.8 = 1.49% of its fund value compared to the swap based ETF. It is like as if the active managed fund ‘defaulted’ 1.49% of its fund value every year!
But of course, the best in the above example comes from Vanguard Emerging Market Fund that has lowest tracking error of just 0.34% per annum. It is also not swap based. Unfortunately, Vanguard Emerging Market Fund is only for Accredited Investors despite its low initial entry amount of just USD 1,000 and the minimum RSP of just USD 100!
Overseas ETFs an alternative?
The next best alternative to gain access to ETFs with low tracking errors are from overseas. I shall not mention the names of these ETFs for obvious reasons.
However, I am always worried about these overseas listed ETFs. Here are some reasons why I am not comfortable with these overseas listed ETFs:
- Depending on where you buy it, dividends are taxed at hefty rate resulting in very poor performance.
- The ETFs that make sense are listed in jurisdictions that imposed inheritance tax.
- Unfamiliarity with foreign laws.
- No recourse should there be any dispute.
- Glaring disclaimer from the ETFs providers that the listed ETFs are not offered to foreigners. So investors who buy these foreign listed ETFs are breaching the terms and conditions.
I personally think that it may be ok to buy a little bit of these overseas ETFs but definitely it is wrong to put one’s entire retirement wealth into it. Let’s say your retirement portfolio is $1 million, putting 10% or $100,000 into these overseas ETFs is probably alright. But don’t blame me if you lose money.
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