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Deutsche Bank quits UK gilt ETFs

Deutsche Bank quits UK gilt ETFs

If you invest in funds, especially ones focused on riskier assets, you can expect them to experience considerable movements in their valuation. But an unexpected disappearance is probably not something you factored in. Yet this is exactly what happened to one of our readers.

Our reader wrote to us as follows: "I have had a position in db x-trackers II UK Gilts Short Daily UCITS ETF (XUGS) as a modest hedge for my bonds and a way to short gilts. Now, at the bottom of the interest rate cycle and the lowest price, I have been told by my self-invested personal pension (Sipp) broker that this exchange traded fund (ETF) is no longer traded. No advance warning was given to me.

"I am now faced with accepting whatever net asset value (NAV) is getting paid as published on 6 September. At a time when most needed (gilts and government bonds look so expensive) there appears to be no ETF to reflect this belief. And where was the mechanism for a timely warning to exit the position?"

The ETF in question was actually delisted, which is not unusual. With such an enormous volume of products being brought to market, providers are becoming more ruthless when it comes to cutting unsuccessful ETFs from their offerings - 21 ETFs have been removed from the London Stock Exchange in the past three months alone. Normally an ETF provider will give several weeks' warning before closing an ETF via a company notice to the market. This counts as a corporate action, which your broker should be notified of by its data company and/or London Stock Exchange, and in turn inform you.

Deutsche Bank says it sent out a notice to shareholders on 29 July 2016 alerting them to the upcoming delisting of six ETFs, due to "sustained small levels of demand". The note was also posted on Deutsche Bank's website.

The last day of trading for these ETFs was 30 August and the ETFs were then closed on 6 September, with redemptions based on the NAV at that date.

However, in the case of the six Deutsche Bank ETFs, including db x-trackers II UK Gilts Short Daily UCITS ETF, it appears that a wide range of investors were not informed of the delisting through the usual channels until they had already stopped trading.

Hargreaves Lansdown, The Share Centre, Charles Stanley Direct and AJ Bell said they had not received any notice of the delisting of the six Deutsche Bank ETFs until 6 September - the date this officially happened.

"We use two data providers to supply us with information on fund closures and as soon as we get notification, we let our clients know," says Laith Khalaf, senior analyst at Hargreaves Lansdown. "Normally this is a few weeks before closure, but in this instance that wasn't the case. We take the information provided to our clients very seriously, even for stocks with very few shareholders like these, and we'll be taking up the matter with our data providers."

AJ Bell said it first heard of the delisting via a Stock Situation Notice from the London Stock Exchange on 6 September and immediately sent out client alerts at that point. The Share Centre and Charles Stanley also only discovered the ETF was closed on that date.

The London Stock Exchange said it was the ETF providers responsibility to tell investors of a delisting but the platforms said they usually received notice through either the stock exchange or a data service, which they did not in this instance.

Hugo Sparks, manager at Charles Stanley Direct said: "Clients were only notified after the ETFs had stopped trading and I can see how that was frustrarting."


How to avoid an ETF delisting

Delistings are not the end of the world - you will get your investment back. But if you are worried about investing in an ETF at risk of closure, you should check the amount of its assets under management (AUM). ETFs with fewer assets are more likely to be at risk of closure. However there are also several niche products with low AUMs that will remain profitable for providers, so this is not a definitive answer.

"ETFs are relatively easy and cheap to set up and close. Providers can try out a product to see if it is popular, and if it isn't close it quickly," says Adrian Lowcock, investment director at Architas. "So investors should check out the size of an ETF before buying it to get an idea of whether it is successful/popular."

You can also monitor the stock market announcements for the ETFs you invest in. Many platforms, including Charles Stanley Direct, offer this in client dashboards or you can check free websites such as www.investegate.co.uk or www.londonstockexchange.com


Deutsche Bank exit

Deutsche Bank has now removed its entire UK gilt offering from the market due to low demand from investors and intense price competition. As well as db x-trackers II UK Gilts Short Daily UCITS ETF, which had €12.91m in AUM at the end of June, it closed the following funds on 6 September:

■ db x-trackers II IBOXX £ GILTS 1-5 UCITS ETF (XG5D) (€6.95m AUM)

■ db x-trackers II IBOXX £ GILTS UCITS ETF (XBUT) (€4.66m AUM)



■ db x-trackers US Treasuries Short Daily UCITS ETF (XUTS) (€2.27m AUM)

By contrast, its db x-trackers Euro Stoxx 50 UCITS ETF (XESC) had €4.9bn in AUM at the end of June.

The move means Deutsche Bank no longer offers any products to UK investors wanting exposure to UK government bonds, a move that several commentators describe as "surprising".

"I understand if these are minor markets, but not to have a UK gilts offering seems a bit absurd," says Alan Miller, founder of wealth manager SCM Direct.

Adrian Lowcock, investment director at Architas, adds: "Gilt yields are so low that it is probably a struggle to make this profitable. Size and scale matters too because ETF providers charge basis points of costs."

And Mr Khalaf says: "The gilt market is not popular for new investment and if you have a fund without money in it you are probably not going to see more inflows in the near future, which I would expect was a major reason for closure."

The gilt ETF sector has also been subject to fierce price competition, which analysts think might have made the situation worse. "Price competition has really heated up in the gilts space, after Lyxor reduced its pricing to 0.07 per cent on gilts earlier this summer," says James McManus, ETF analyst at investment manager Nutmeg. "This is great for investors and we have already taken advantage of this in our portfolios by switching both our full-duration gilts and shorter-duration gilts to the relevant Lyxor products, saving clients a substantial amount in management fees each year.

"Lyxor has really set the benchmark for pricing at a very competitive level, and it's difficult to see how others can compete with this without entering a race to the bottom, or running products as loss leaders."

There are still 10 UK gilt ETFs listed on the London Stock Exchange, including iShares Core UK Gilts UCITS ETF (IGLT), SPDR Barclays 1-5 Year Gilt UCITS ETF (GLTS) and Vanguard UK Gilt UCITS ETF (VGOV).

The iShares ETF tracks long-duration UK gilts and pays dividends twice a year. Vanguard is invested across the maturity spectrum with 18 per cent of its assets in bonds with a duration over 30 years, and 14 per cent in bonds with a duration between one and three years.


ETFs for betting against UK gilts

Our reader also asked how she can continue to short UK gilts (bet on their value falling) using ETFs now that db x-trackers II UK Gilts Short Daily UCITS ETF has delisted. She likes short ETFs, but there is now only one of these listed on London Stock Exchange focused on gilts.

However, short ETFs are very high-risk vehicles and a different form of bond ETF might be a better option. Short or inverse ETFs are designed to do the opposite of the benchmark they track and are a way of betting against the performance of an asset.

For example, db x-trackers II UK Gilts Short Daily UCITS ETF returned twice the opposite return of gilts and was calculated on a daily basis. As gilts have risen this ETF ratcheted up some major losses. It tracked the UK Gilts Short Daily index and over five years the ETF lost 30.5 per cent. But the iBoxx UK Sterling Gilts All Maturities index, a broad UK Gilt index, returned 42.1 per cent over that time.

Mr Miller says: "We are not great believers in short ETFs as unless you get the movement working in your favour over a very short period of time, you normally lose money due to the way these ETFs reset themselves daily."

Oliver Smith, portfolio manager at broker IG, says: "I would never recommend a daily leveraged ETF to any retail client, but Boost Gilts 10Y 3x Short Daily ETP (3GIS), the only similar product to db x-trackers II UK Gilts Short Daily listed on the London Stock Exchange, could be an option for an experienced investor."

This exchange traded product (ETP) is a very high-risk option that delivers three times the inverse return of long-dated gilts. For example, if the index rises by 1 per cent, this ETP falls by 3 per cent and vice versa.

It is also invested in futures contracts rather than directly invested in assets, which introduces the further risk of losing money if there is a large gap between the price of UK government bond futures and the spot price.

A better route for investors worried about the price of gilts could be short-dated bonds.

Mr Smith says: "It's a tough one. For a long-only investor benchmarked against the FTSE All Gilts Index, a short-dated ETF such as iShares UK Gilts 0-5yr UCITS ETF (IGLS) would offer some relative protection against a fall in the gilt market. However, from an absolute perspective, they would still make losses."

Mr Miller adds: "As your reader rightly points out, UK gilt yields are insane in our view, and the longer the maturity, the more insane they become. If the reader is extremely cautious about investing in bonds, an alternative might be a short-term Sterling corporate bond ETF. There is little to be gained from investing in a short-term gilt ETF that typically yields around 0.4 per cent a year, by the time you have paid the costs of the ETF - normally about 0.2 per cent a year, let alone any platform costs. And you can still pick up a reasonable yield from shorter-term corporate bond ETFs."

Mr Miller highlights SPDR Barclays 0-5 Year Sterling Corporate Bond UCITS ETF (SUKC) and iShares £ Corporate Bond 0-5 yr UCITS ETF (IS15).

"They are very similar in terms of charges - both charge 0.2 per cent," he explains. "They are also very similar in terms of the average credit rating of the bonds they track, both about A-. The underlying yield of the SPDR ETF is marginally higher at 1.59 per cent versus 1.52 per cent for the iShares fund, but the effective maturities of the ETFs' bonds are almost the same at 2.5 and 2.6 years respectively. However, the iShares ETF is much larger with assets of £971m against £73m for the SPDR fund."

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By Kate Beioley ,
15 September 2016

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