Xtrackers’ recent launch of two German-listed global active ETFs bucked the trend for lower-risk actively managed exchanged-traded funds in Europe.
Artur Stoll, product specialist at DWS, the German fund manager behind the ETF provider, said Xtrackers’ Global Equity Top Active UCITS ETF (XTAX) and Global Growth Leaders Active UCITS ETF (XGLA) had opted for “tracking errors” of 3-4% and 7-8% respectively when they launched on the Xetra exchange in March.
Tracker errors measure the difference between the returns of a fund and its stock market benchmark. Tracker funds naturally have low tracking errors as they seek to mimic an index in contrast to actively run funds which try to select fewer, better stocks with a view to beating their comparator index.
Stoll said just having a higher tracking error didn’t automatically increase outperformance as the active manager had to pick the right stocks.
The risk of fund managers getting their stock picks wrong is one reason why European active ETFs had mostly gone down what Stoll called the “augmented outcome” route, using derivatives to target a preferred return and reduce the risk of underperforming the stock market. Here tracking errors stood at around 1.5%.
That was in contrast to the US, where highly active stock-picking ETFs focusing on generating “alpha” or significant outperformance tolerated much higher tracking errors.
Stoll said Xtrackers had adopted this model as it wanted to attract DIY investors in ETFs who liked the idea of accessing active portfolios within a lower-cost structure.
Speaking online to journalists, he said this “could open a whole new client segment of self-directed” investors who “trade over digital platforms and would never buy an active mutual fund”.
Fund manager Katharina Seiler said the Top Active (XTAX) fund, which charges 0.35% a year, aimed to hold 100-150 global stocks that were the “best ideas” of its 50-strong team of analysts.
She said the portfolio, which has nearly 70% in the US, was “tilted” towards the most attractive sectors and companies and was rebalanced every quarter. A tracking error of 3-4% was to ensure its concentration in US megacap stocks did not become “excessive”. Its top five holdings are Amazon, US chip maker Broadcom, Taiwan Semiconductor, Google-owner Alphabet and Advanced Micro Devices of the US.
The Global Growth Leaders (XGLA) fund is more concentrated with under 50 stocks and a higher tracking error of 7-8% versus an index like the MSCI World. She said it followed a “rule of 40” to pick potentially higher return stocks whose sales growth and profit margin percentages added to more than 40. It is also heavily weighted to the US but its top holding is Taiwan Semiconductor followed by $5.4trn US chip colossus Nvidia and South Korean memory chip specialist SK Hynix.
Our view
David Batchelor, senior analyst at QuotedData, said: “Xtrackers’ move is another sign that Europe’s active ETF market is starting to move beyond cautious, low-tracking-error products and into more recognisably active stock-picking strategies. The German angle is important here: DWS is not just a major European ETF provider, but a German asset manager trying to bring active management into a wrapper that fits how a new generation of self-directed investors actually invests. With Germany’s retail market increasingly focused on ETF savings plans and digital platforms, the launch of XTAX and XGLA suggests active ETFs are being positioned not just as institutional tools, but as mainstream portfolio building blocks for retail investors”.
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