DWS plans active overhaul of emerging markets climate ETF
DWS is seeking shareholder approval to convert its Xtrackers MSCI Emerging Markets Climate Transition UCITS ETF (XEMC) from a passive climate-focused strategy into an actively managed emerging markets fund.
Under proposals put to investors, the ETF would be renamed the Xtrackers Emerging Markets Equity Enhanced Active UCITS ETF and would no longer track the MSCI Emerging Markets Select Sustainability Screened CTB Index. Instead, its managers would use a bottom-up stock-selection process, with the MSCI Emerging Markets 10/40 Index used only as a performance benchmark. Shareholders are due to vote on the changes at an extraordinary general meeting on 23 October.
The proposed overhaul would also substantially change the fund’s sustainability positioning. Its classification under the EU’s Sustainable Finance Disclosure Regulation would change, while the existing climate-transition benchmark would disappear. The new process would retain a range of exclusions, including controversial weapons, tobacco and companies expanding thermal coal and oil sands activities.
Investors would also pay more for the new approach. The all-in fee is proposed to rise from 0.16% to 0.30% a year. DWS describes the replacement strategy as having relatively low active share, meaning its portfolio may still remain fairly close to the emerging markets benchmark despite the move to active management.
The changes follow a sharp contraction in the ETF. Published Xtrackers NAV figures show that it had around 3.28m shares outstanding and assets of approximately $179m on 10 June. By 28 September, the share count had fallen to around 765,000 and assets to approximately $43m – a decline of roughly 76% in less than four months, largely reflecting investor redemptions rather than market movements.
The ETF was launched in September 2023 and was originally designed to give investors emerging markets exposure while meeting the minimum requirements of an EU Climate Transition Benchmark.
Our view
David Batchelor, senior analyst at QuotedData, said: “This is a more fundamental change than simply handing an index-tracking portfolio to an active manager. Investors bought XEMC for a specific climate-transition mandate and, if the proposals are approved, they will instead own a broader actively managed emerging markets strategy with a different sustainability classification and a considerably higher fee.
“The substantial fall in the fund’s assets provides some context for the proposed overhaul. Rather than closing a relatively small ETF, DWS is attempting to give it a new purpose. We have already seen JPMorgan and Fidelity convert passive ETFs to active management this year, but the removal of the climate-transition objective makes this an especially interesting example of how providers are reshaping existing ETF ranges as demand evolves.”
