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DWS’s Oliver comments on ETF winners during recent market volatility


DWS’ Head of Index Investing, Luke Oliver reports that ESG ETFs achieved modest outperformance over the period of market volatility demonstrated from February this year.

DWS’ Head of Index Investing, Luke Oliver reports that ESG ETFs achieved modest outperformance over the period of market volatility demonstrated from February this year.

“Companies that do not score highly in ESG terms are arguably less prepared for certain risks, and in this environment, some firms that are removed from our ESG funds have been very much affected by the pandemic,” Oliver says.”

Oliver explains that DWS’s approach to ESG is both values aligned, and very much about mitigating risks.

“There is something there that is quite powerful – it’s not just a concept or a belief system but actually a risk mitigant,” he says. “These are non-financial metrics which have a financial impact.”

DWS’s ESG offering is designed to give a similar exposure to the S&P 500 and the MSCI EAFE and other MSCI indices. 

“I like to think that we will track in line with benchmark but with a biased potential for the upside as the ESG factors play out,” Oliver says. “I also like to think we will see more adoption of ESG after this.”

Oliver’s role at DWS is to run the ETF business, plus the indexed institutional mandates business and passive index based mutual funds which the firm has had in the past.

During the volatile markets of the early part of this year, Oliver has seen investors making tactical changes through ETFs.

“It’s been a really interesting time,” he says. “With more volatility we expect more creations and redemptions because ETFs are easy to dispose of by design, they’re both tactical and strategic, and in the US, a way to think about taxation, with investors locking in losses and moving into different ETFs which means that our platform has seen some interesting flows.”

DWS has seen money going into ultra-short ETFs and money markets and also there has been a return to taking risk and putting money back in so there have been some good days of inflows.

The firm’s high yield ETF HYLB has seen strategic implementation by investors. “It’s the most cost-effective high yield ETF at 15 bps,” Oliver says. “We have seen a lot of money strategically flow in to HYLB and then come out early in this crisis.”

Historically, the only two periods, other than now, when high yield spreads have gone to 1000 bps are 2002 and 2008 and when the markets began to recover from that, high yield returned more than stocks. “People have observed that from then and are now buying HYLB,” he says. “ETF models are adding HYLB as a long-term strategic allocation and also as an overweight position. It’s not just a tactical trade but strategic, going in tactically overweight and long strategically.

“It’s exciting for us to have a product in the sweet spot at 15bps, when our competitors are at 49 and 40 bps.” HYLB has USD3.5 billion in assets, while DWS in the US has USD13 billion in assets in ETFs and globally USD100 billion. 

Oliver is also keen on currency hedging through ETFs. “We are the biggest currency hedging ETF managers in terms of international equities and people don’t talk about currency enough,” Oliver says. “There is a strong case that people need to be thinking about currency hedging as there is increased volatility in currencies as the central banks weigh in. The correlation between stocks and currencies has become closer, so in volatile times, currency hedging makes sense.”

Oliver comments that the subject of market liquidity and ETFs comes up a lot. His observation is that the market makers stepped in and managed ETF exposure during volatility well. “Volatility is when market makers make money,” he says. “Volatile periods are when you see the stock prices of trading firms go up, when everything else is going down.”

He comments that bond prices are not moving every split second of the day but bond ETF prices are as they are at the prices people are willing to trade at. 

“If an ETF is trading more cheaply than those bonds, you won’t be able to sell the bond at those prices.”

ETFs represented over 40 per cent of daily trading at the height of the volatile period.  Oliver pointed out, for illustration, that prior to this crisis, the daily volume of high yield bonds was around USD10 billion and the daily volume of bond ETFs was around USD3 billion, but with only USD300-500 million of ETFs created and redeemed. This means that ETFs were adding USD2.5 billion of liquidity in the market.

“The ETF structure puts a risk manager between the market and the investor,” Oliver says. “When an investor sells, the portfolio manager doesn’t need to sell as the market maker will manage that risk. ETFs can be more risk managed than traditional wrappers.”

Read ETF Express’s interview with Manooj Mistry, Head of Index Investing, here

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