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Stephan Kraus, Deutsche Borse

Deutsche Börse employs business incentives to build ETF book

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By Jan Wagner – As Deutsche Börse prepares to celebrate the 20th anniversary of its ETF business, Stephan Kraus, head of ETFs, talks about the segment’s huge growth, the trend toward ESG-themed products and why the exchange is trying to persuade German savers to consider ETFs as an investment alternative…

By Jan Wagner – As Deutsche Börse prepares to celebrate the 20th anniversary of its ETF business, Stephan Kraus (pictured), head of ETFs, talks about the segment’s huge growth, the trend toward ESG-themed products and why the exchange is trying to persuade German savers to consider ETFs as an investment alternative…

This coming April, German stock exchange operator Deutsche Börse will celebrate the 20th anniversary of its ETF business. Given how well the business has done, it promises to be quite a party. Back in April 2000, Deutsche Börse was the first European exchange to list ETFs – in that case a fund that tracked the EuroStoxx 50 and one that tracked the Stoxx 50 Europe..

Nearly 20 years and two market crashes later, there are 1,507 ETFs listed on Deutsche Börse’s Xetra platform. These ETFs track every major stock or bond index, from the S&P 500 and the MSCI Europe to the Bloomberg-Barclay barometers and the sustainable version of the Stoxx 600 Europe.

At the party, Deutsche Börse’s ETF staff will likely raise their glasses to 2019 in particular. Last year was one of the segment’s best ever, with 180 new ETFs added to the Xetra platform and two more ETF specialists – US investment bank Goldman Sachs and Tabula, a UK-based fixed income ETF provider – entering the German market.

Between those additions and last year’s bullish stock market, ETF assets under management (AuM) on Xetra rose 33 per cent to EUR710 billion. Of this volume, roughly 90 per cent is estimated to come from institutional investors and the rest from private clients.

“Last year’s growth in terms of new product launches was surprising given that the ETF industry has become quite mature. It reflects that providers still see enormous potential for the funds,” says Kraus, who was interviewed for ETF Express at the exchange’s “Cube” headquarters in the Frankfurt suburb of Eschborn.

Reflecting a larger trend in European society, sustainability, or ‘ESG’ in financial jargon, was the dominant theme among the new ETFs on Xetra in 2019. No less than 62 of the products had the designation ESG, which stands for the environmental, social and governance criteria that the companies must uphold to be included. Kraus cites some examples, including ETFs that exclude certain sectors like outlawed weapons (eg cluster bombs or landmines) or ETFs that eschew firms with high carbon emissions.

“ESG-themed ETFs were undoubtedly the fastest-growing product in 2019, and we expect this trend to continue in 2020,” says Kraus. These funds now account for 10 per cent of all the ETFs listed on Xetra, and Kraus says their proliferation has been mainly driven by institutions like sovereign wealth funds who have clear ideas on how they want to sustainably invest. ETF providers are scrambling to meet that need, which in most cases has to do with the transition to a low-carbon economy.

While ESG has become the dominant theme for new ETFs, Kraus says that, as in past years, smart beta strategies continue to be an important theme for investors. Last year, there were 14 of these products added to Xetra, bringing their share on the platform to 14 per cent. Like ESG-themed ETFs, smart betas differ from their conventional brethren by including an active management component – namely the selection of companies based on a certain factor. These factors include value, quality, momentum and low volatility.

Kraus also says that the growth in Deutsche Börse’s ETF business is increasingly being driven by German private investors looking for alternatives to savings accounts which are eroding their wealth. Indeed, official statistics reflect that of the EUR6.2 billion that Germans have put aside, 40 per cent is in cash accounts that bear very little interest. German banks have even begun charging negative interest rates on savings in some cases. This is due to the negative interest rate that the banks themselves are charged (currently minus 0.5 per cent) when they store excess liquidity at the European Central Bank (ECB).

“In this interest rate environment, we feel that it’s our obligation to point out that there are capital market alternatives like ETFs which are far more attractive from a return and diversification perspective,” says Kraus. He notes that this message is resonating well, as evidenced by the significant growth in ETF savings plans in Germany last year. At the end of last December, the number of those plans totalled 1.2 million, up 40 per cent from the previous year. To support this trend, last October, Deutsche Börse removed all transaction costs for ETF savings plans offered by German banks. With respect to the 630,000 buy and sell orders carried out on the Xetra platform each month, Kraus estimates that 35 per cent originate from private investors. The other 65 per cent come from institutions.

Another business incentive is an online tool that Deutsche Börse calls the “intraday Xetra liquidity measure,” or just iXLM. Kraus explains that the tool enables ETF investors to determine when transaction costs are at their lowest during the trading day.

“For example, if an investor buys or sells US equity ETFs in the late morning or just before the close of trading day at 5:30 pm, that investor can save up to 30 per cent in transaction costs,” he says. There is no charge for iXLM, which can be easily accessed on Deutsche Börse’s website.

Finally, Kraus was asked about Deutsche Börse’s move to provide investors with the ability to design their own market indices. The do-it-yourself platform is called “Stoxx iStudio” and is run by Qontigo, a new unit. Qontigo’s rise follows Deutsche Börse’s acquisition of Axioma, a New York-based provider of portfolio management and risk analysis software. Says Kraus: “I don’t speak directly for Qontigo, but my sense is that the launch of the DIY platform Stoxx iStudio follows the growing need among investors for customised indices, like those oriented to ESG or smart beta. It will be exciting to see what happens with the platform.”

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