Deutsche Asset Management is planning to launch six US sector ETFs on Deutsche Börse and London Stock Exchange in the coming weeks. The funds will track indices created by leading index provider to the ETF industry MSCI and will provide exposure to the energy, financials, health care, information technology, consumer discretionary and consumer staples sectors of the US economy.
Simon Klein, head of passive distribution, EMEA and APAC, Deutsche Asset Management
Each index is designed to capture the large- and mid-cap segments of the US equity universe while selecting securities classified according to the sector definitions laid out in the Global Industry Classification Standard (GICS), a well-recognized industry taxonomy co-developed by MSCI and Standard & Poor’s.
Sector ETFs provide a means for investors to adjust their exposures simply and cost-efficiently in response to changes in the economic cycle. Such ETFs are popular building blocks within a sector-rotation strategy where managers attempt to outperform the broad market through careful timing of various sector plays.
In the early phase of the business cycle, the broad stock market tends to do well as expectations for future economic activity turn increasingly upbeat. On a relative basis, cyclicals and interest-rate-sensitive sectors such as consumer discretionary and financials tend to outperform. Furthermore, economically sensitive sectors such as technology and industrials receive boosts from increased activity.
During the mid-cycle phase, economically sensitive sectors may continue to outperform with industries that receive greater product demand once the recovery has been established doing particularly well. Most stock market corrections have historically occurred during this phase, however, leading to less reliability of historic analysis as a determinant of sector outperformers.
As the economic recovery reaches its later stages, inflationary pressures push up the costs of raw materials which tends to directly lead to the relatively strong performance of companies in the energy sector. Defensive sectors may also provide market-beating returns.
Simon Klein, head of passive distribution, EMEA and APAC, Deutsche Asset Management, commented: “We already have sector ETFs for Europe and the world. The new sector ETFs based on the MSCI USA give investors the flexibility to trade at a more granular level than region or country. As ETFs are used more tactically, this kind of granularity is important.”
Indeed the cost efficiency and ease of access offered by ETFs when implementing a sector rotation strategy has led to a significant uptick in demand for these products in recent years. Research released by State Street Global Advisors in May 2017 revealed there has been a fivefold increase in assets invested in globally listed sector ETFs since 2008, reaching $394 billion in AUM by the end of 2016.
The new Deutsche ETFs will be offered with total expense ratios (TERs) of 0.12%, priced a few basis points below the range of SPDR S&P US Select Sector ETFs which costs 0.15%. The move highlights how competition in the ETF provider space is putting downward pressure on fees and benefiting the investor.
The names and ticker codes of the funds due to be launched are outlined below:
db X-trackers MSCI USA Energy Index UCITS ETF (XUEN)
db X-trackers MSCI USA Financials Index UCITS ETF (XUFN)
db X-trackers MSCI USA Health Care Index UCITS ETF (XUHC)
db X-trackers MSCI USA Information Technology Index UCITS ETF (XUTC)
db X-trackers MSCI USA Consumer Discretionary Index UCITS ETF (XUCD)
db X-trackers MSCI USA Consumer Staples Index UCITS ETF (XUCS)
Deutsche’s range of global sector ETFs also track MSCI indices and are offered with TERs of 0.30%. The firm’s suite of European sector ETFs are derived from the Stoxx Europe 600 Index; each also has a TER of 0.30%.