Martin Kremenstein, the Chief Investment Officer at DB Commodity Services, is keen on making investors aware that Deutsche Bank aims to become a bigger player in the U.S. ETF market. Truth be told, Deutsche Bank is already among the top 10 players. But most of its assets are folded into those of Invesco PowerShares, which markets Deutsche products under the âPowerShares DBâ brand.
Kremenstein isnât taking sides when it comes to discussing how the recent U.S. rollout of Deutscheâs db-X ETF brand will affect the PowerShares DB product line. Instead, he told IndexUniverse.com Managing Editor Olivier Ludwig heâs equally excited about both the new lineup of db-X currency-hedged equity funds and the new PowerShares DB ETNs that give investors access to single-country sovereign debt.
Ludwig: What does the db-X product line mean for your relationship with PowerShares? The last time I looked at the numbers, I think PowerShares had around $55 billion under management, and about a quarter of that is actually Deutsche Bankâs assets.
Kremenstein: We wanted to expand our product lineup. Weâve done well in the commodities, currencies and alternative spaces, but we wanted to break into a more mainstream marketplace. We decided to launch a securities-based platform, and at the same time thought that it would be a good opportunity to launch the db-X brand in North America. Given the strengths of the brand in Europe and its success there, we thought this would be a good opportunity to bring this to the U.S. market.
Ludwig: So, how is the U.S. db-X rollout going?
Kremenstein: Itâs going well. We re-branded the TDX Independence funds to be the db-X Target Date funds. Weâve launched the five MSCI currency-hedged funds. We're getting a lot of interest in those from investors. [(NYSEArca:DBJP), (NYSEArca:DBBR), (NYSEArca:DBCN), (NYSEArca:DBEF), (NYSEArca:DBEM)].
Itâs a complex story to get out there and tell people. Not a lot of investors were aware that they are running currency risk in their international equity portfolios. People have been buying international equities because of their outperformance over the U.S. market. If you look at the EAFE Index, all of its outperformance over the S&P 500 over the last 10 years has come from the currency component; that is, being short the U.S. dollar and long on foreign currencies.
Itâs the same thing with Japan. In Canada, half of the outperformance over the S&P has come from the Canadian dollar strength over the U.S. dollar. Currency movements have also been a big contributor to the outperformance of Brazilian and emerging markets equities over domestic equities over the last 10 years.
If you look at dollar trends over the last 40 or 50 years, theyâve tended to move in six- to 10-year bands, the average being seven years at a time. We had a seven-year band from 2001 to 2008, when the dollar declined by 40 percent, and itâs been trading sideways ever since.
We brought these products to give investors an opportunity to manage the returns that theyâre getting from the currency exposures, within their equity portfolio.
Ludwig: Are people even aware that the âDBâ in the PowerShares DB products you sponsor with PowerShares has anything at all to with Deutsche Bank?
Kremenstein: I think the market is well aware of the PowerShares DB lineup, and people are aware that Deutsche Bank is the fund manager there. Our track record in the commodity and currency ETF space serves in our favor. When we launched (NYSEArca:DBC) five years ago, from the start we were talking about roll yield and how it can affect your returns. Most investors had not heard about roll yield, and just knew they wanted to be in commodities. Now, five years later, everybody seems to know the words âcontangoâ and âbackwardation.â
Ludwig: Can you elaborate at all as to how you might delineate the PowerShares DB and the db-X product lines? I presume you donât want to be launching competing products under both brands, right?
Kremenstein: We wonât be competing. I think we have a well-defined theme under the PowerShares DB brand, and so weâre going to keep that.
But we have other products and other things that we want to launch, which weâre going to launch under the db-X brand. The bank has no interest in competing with itself.
Ludwig: Is it fair to say that there may be more emphasis on one than the other? I presume that, from a financial perspective, that db-X is probably going to be more profitable to Deutsche Bank than the PowerShares DB, simply because you donât have to give up any basis points to cover those marketing costs that PowerShares now performs under that agreement.
Kremenstein: We have a strategic vision about where we want to go, but I donât see us favoring one brand over the other. Theyâre both very distinct. And I think, to a certain extent, you bring out what you think the market wants and what you think is going to work well in the market. If that turns out to be products that would fit much better under the PowerShares DB brand, then thatâs what weâre going to be launching. If it turns out that it would be products that would fit better under the db-X brand, then thatâs what weâll be launching.
Ludwig: And what would be a measure of success for db-X products as far as assets under management that youâre willing to discuss?
Kremenstein: We want to get a platform out there that is self-sustaining and is accepted by the marketplace. No one launches an ETF platform looking to get a few million dollars of assets. You are generally looking to get your assets into the billions. Where that actual number is, I couldnât actually say, for sure.
Ludwig: You spoke a bit about the optimal yield roll of the DBC. Can you speak a little bit to that productâs methodology, as it relates to the ETFs United States Commodity Funds is serving up now? The obvious two in the space to compare at this juncture are DBC and (NYSEArca:USCI). Or, if itâs just oil, (NYSEArca:DBO) vs. (NYSEArca:USL)? Perhaps DBO and USL are more interesting to compare, because those exposure schemes are quite different, right?
Kremenstein: I canât comment on other products, but DBO only selects one contract. It uses the optimum-yield methodology, when itâs time to roll exposure, to find the futures contract over the next 12 months, with the best implied roll yield. And itâs worked well. DBO is the best-performing West Texan crude product both year-to-date and over the longest time period that you can compare all of the products out there in the marketplace. Clearly, optimum yield has done a good job in terms of mitigating roll costs when the curve is contangoed, and profiting from backwardated curves.
Ludwig: I understand that you donât want to talk too much about other products, but in the case of DBC vs. USCI, itâs hard not to see those as direct competitors. You have multicommodity funds that own different contracts based on a rules-based system that chooses contracts with the least contango or the most backwardation, as it were. Iâve looked at the return numbers and, in the recent past, DBC has done relatively well. Is it because of crude oil?
Kremenstein: I think there are a couple more variables. DBC is up 9 percent year-to-date. Itâs actually outperformed all the other broad commodity products available, whether theyâre following front-month indices or theyâre rebalancing monthly or some other methodology. I donât think itâs the energy exposure, because if you look at, say, the GSCI, itâs flat year-to-date, so it canât be just the energy exposure.
Ludwig: GSCI being the quintessence of a heavy energy exposure for an index?
Kremenstein: Exactly. So, itâs not just the energy component. I think optimum yield has worked very well year-to-date. From a long-term, buy-and-hold perspective, DBC has shown its worth over the five years since it was launched. It has massively outperformed the benchmarks. And itâs able to do that at very high asset levels. Weâre not doing this at a few hundred million dollars in size. We're doing this at a $6 billion asset level.
Ludwig: Letâs turn our attention to the sovereign debt ETNs youâve rolled under the PowerShares DB brand. You have German bonds, Italian, Japanese and U.S. Can you speak to how those products might be used, given the current environment? Thereâs obviously a lot going on right now.
Kremenstein: We launched the leveraged U.S. Treasury, ultra-long Treasury bond products first. We saw use of those in a couple of ways. One was for traders who wanted to trade on U.S. rates at the far end of the curve.
The duration of the ultra-long bond future is about 16 years, and the ETNs are leveraged three times. So, youâre looking at 48-year duration. That makes it a targeted way to take a concentrated view on where rates are going to be. And weâve seen a reasonable amount of interest in the triple short. Weâve used monthly rebalancing, which has served it very well. We use monthly rebalancing in all of our leveraged products rather than daily, and thatâs why youâve seen (NYSEArca:SBND) outperforming competitor products that have daily rebalancing built into them.
Ludwig: Itâs short with regard to the price. So if youâre short on SBND, youâre looking for rates to rise and the price to get crushed.
Kremenstein: Thatâs correct. And it can be used to hedge out the interest-rate risk in your bond portfolio. Letâs say youâve got a portfolio of corporate bonds, and you like the credit, but you donât like the rates environment. You can use a small amount of SBND to try to hedge out some of that interest rate risk in your portfolio. So, itâs a capital-efficient way to hedge your portfolio.
Ludwig: How about some of the other products? What are some of the ways they can be used?
Kremenstein: With regard to the European and Japanese products, there arenât any other ways to get exposure to single-country government debt markets. These are good tools for people to use. Thereâs a single-long Germany (NYSEArca:BUNL) thatâs up 13.5 percent since it was launched about four months ago. The triple long is up 45.25 percent. And then if you look at the Italian single long, thatâs down 3.20 percent since it was launched at the same time.
Now, you couldâve taken a position in long Germany, saying you want to have a safe haven or another way to diversify your portfolio, buying German government debt. Or you could have tried to do some kind of pairs trade, going long BUNL and short (NYSEArca:ITLY). You would have picked up about 15 percent there.
So, again, weâre looking at tools to enable investors to start to take a more precise view on things. There are a lot of single-country equity funds out there. There are a lot of bond funds out there. And over the last years, two big trends have been toward single-country equities and towards bond funds. And we thought weâd try and put those two trends together with single-country bond products.
Ludwig: Can you speak to the Japanese product for a moment? The Japanese yen is one of these wild cards, right? The currency isnât really behaving in a way that reflects âQE25,â or whatever theyâre up to now after 20 years of quantitative easing.
Kremenstein: The single Japanese product is up 2 percent since it was launched, and it has moved with fairly low volatility. So, again, it can be a nice diversifier in a portfolio and useful for investors who want to do some asset allocation.
The leveraged product has a bit more volatility. And, again, if investors want to express a view at some point, such as Japan having to raise rates, then shorting these products could be a very good way to do it.
Ludwig: Whatâs your macro view at this juncture? There are a lot of crosscurrents that have a lot to do with debt, yes?
Kremenstein: I canât give investment advice, but volatility has been fairly pronounced. Investors need to pay attention to whatâs going on, and if the market changes, so should your strategy. Investors need to adapt to the market environment.
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