DWS rolls out US banks ETF

Dec 6th, 2018 | By | Category: Equities

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DWS has expanded its sector offering with the launch of the Xtrackers USA Banks UCITS ETF (XUFB LN) on the London Stock Exchange.

Amanda Rebello, DWS Head of Passive Distribution, UK and Ireland

Amanda Rebello, DWS Head of Passive Distribution, UK and Ireland.

The fund, which will also list on Xetra, is linked to the modified market cap-weighted MSCI USA Banks 20/35 Capped Index, providing exposure to US banks.

It comes with a total expense ratio of just 12 basis points.

The underlying reference index screens the parent MSCI USA Index, which covers large- and mid-cap US equities, for firms that are classified as ‘banks’ according to the Global Industry Classification Standard.

To ensure UCITS compliance, the largest constituent is constrained to a weight of 35%, and the weights of all other constituents are capped at 20%.

Around three-quarters of the index is currently allocated to diversified banks, while the remaining quarter is in regional banks. JP Morgan is the largest of the 22 holdings, representing a quarter of the fund (25.6%). The next largest constituents are Bank of America (18.2%), Wells Fargo (17.0%) and Citigroup (11.2%).

Rebalancing occurs on a quarterly schedule.

According to DWS, US banks are set to benefit from strong fundamentals and wider sector deregulation.

While bank valuations soared following the Trump election, the issuer notes that P/E-multiples continue to lag behind the broader US market. And the recent rollback of banking regulation and stress testing in the US provides the scope for dividend payout and buyback programmes, a significant source of return for investors.

DWS also notes that US banks are well positioned to benefit from future interest rate rises in the US due to the direct link between their valuations and interest margin improvements. Similarly, US banks are expected to over-proportionally benefit from further inflationary pick-up compared to the broader US market.

On the flip side, however, DWS concedes that banks’ deposit beta – the amount of rate increase passed on to depositors – is set to rise as US rates have already moved clear of the 0% mark. This points to lower incremental upside for banks’ profitability as rates continue to rise.

Amanda Rebello, DWS Head of Passive Distribution, UK and Ireland, commented, “This competitively priced ETF further expands our suite on US sectoral exposures. With the possibility of rising interest rates and inflation in the US providing further tailwinds for the US banking sector, we expect healthy demand for the exposure.”

The fund is physically replicated and trades on the LSE in US dollars. Income is distributed to investors.

The ETF will compete with similar exposures from BlackRock and Lyxor, both of which launched earlier this year.

The iShares S&P US Banks UCITS ETF (BNKS LN) debuted in May and tracks the S&P 900 Banks (Industry) 7/4 Capped Index. Its 49 constituents are sourced from the S&P 900 Index, with the weight of the largest five components capped at 7% and the remaining index components capped at 4%.

The Lyxor S&P 500 Banks UCITS ETF (BNKU LN) followed shortly after in June and is linked to the S&P 500 Capped 35/20 Banks and Diversified Financials Select Index. Similar to the new Xtrackers fund, the largest constituent is capped at 33% and all remaining stocks are capped at 19%. (Not 35% and 20% as the index name suggests). It currently holds 36 stocks in its portfolio.

The Xtrackers ETF will likely pick up new inflows into the sector thanks to its cheaper total expense ratio; the Lyxor and BlackRock products charge 0.20% and 0.35% respectively.

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