Deutsche Bank Offers Currency ETFs for Exchange Rate Hedging

June 16th, 2011 by Trefis Team
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DB: Deutsche Bank logo
DB
Deutsche Bank

Source: DB

Deutsche Bank (NYSE:DB) announced that it is launching 5 currency exchange traded funds (ETFs) for investors looking to hedge the risk of exchange rate fluctuations on their foreign investments. [1] We cover Deutsche Bank’s trading and structuring activity for exchange traded products and foreign exchange instruments under its Sales and Trading division – a market where the bank competes against Bank of America (NYSE:BAC), Citigroup (NYSE:C), Morgan Stanley (NYSE:MS) and Goldman Sachs‘ (NYSE:GS). The Sales and Trading division contributes to approximately 28% of our near $61 price estimate for Deutsche Bank which is a 5% premium over the current market price of the stock.

Overseas investment hedging through currency ETFs

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Investors based in the US with exposure to instruments based in foreign markets see their returns from these investments fluctuate with variations in foreign exchange market. Historically, with the dollar declining at approximately 5% every year from 2002 to 2008, these investors benefited as their dollar converted returns increased. However, there is a concern that the days of the declining dollar may be over and that appreciation in its value may decrease the returns on foreign assets.

Deutsche bank’s five NYSE listed currency ETFs based on the Japanese Yen, the Brazilian Real, the Canadian Dollar, the East Asian currencies basket and the emerging market currencies basket will provide investors with tools to hedge the risk of the dollar appreciating against these currencies.

Deutshce Bank is not in unfamiliar territory

Deutshce Bank launched its first currency ETF for the Euro in 2008 which generated $329 million for the bank in 2 years. [2] Buoyed by the enthusiasm shown by banks, hedge funds and pension funds to the fund, Deutsche Bank launched 2 more ETFs in 2010 covering the US Dollar and the British Pound.

The latest offerings are targeted at US based investors who want to reduce their risk to currency fluctuations or hold a view that the dollar may appreciate in the future. If Deutsche Bank can replicate the success of its Euro based ETF for these new offering, it can have a strong positive impact on its sales and trading assets for bonds, commodities and currencies.

What could be next for Deutsche Bank

The move to independently launch more currency ETFs has been seen as a prelude to the company launching its own equity ETFs in the future. [3] Historically, Deutsche Bank has launched its currency and commodity ETFs in partnership with PowerShares. Moving into the Equity ETF market can hold a significant opportunity for the bank’s equities sales and trading operations.

See our full analysis for Deutsche Bank.

Notes:
  1. Deutsche Bank launches currency ETFS, MarketWatch [↩]
  2. Deutsche Bank to Offer Two Currency ETFs in London for Institution Demand, Bloomberg [↩]
  3. Deutsche Bank Planning International Equity ETFs, ETFdb [↩]