German retail investors on digital platforms have driven at least half of recent inflows into DWS’s overnight rate ETF with no cash account able to match its high interest offering.
Launched in 2007, the $8.3bn Xtrackers EUR Overnight Rate Swap UCITS ETF (XEON) became Europe’s fastest-growing ETF in absolute terms the following year, however, spent a decade in the dark amid the era of zero interest rates.
XEON has now surged back to prominence. Tracking the Solactive €STR +8.5 Daily Total Return index, the ETF offers exposure to the interbank rate for one-day loans between 28 EU panel banks in euros, calculated by the European Central Bank (ECB).
With the interbank rate bouncing from -0.58% in July 2022 to 3.91% today, investors piled a colossal $6.4bn into XEON between the start of January 2023 and the end of April this year, according to data from ETFbook.
German digital drivers
An interest rate-pinned product gathering vast assets while rates are high may be impressive but unsurprising. More surprising is the demographic of investor leading the inflows into a seemingly specialist product.
“Looking into last year and this year so far, a good chunk is coming from digital retail channels – and maybe a little more than half of inflows through Q1 – because they do not have to hop around the 20 different online brokers in Germany to generate interest on cash,” Ferat Öztürk, EMEA head of digital distribution at DWS, told ETF Stream.
While some neo-brokers in Germany offer interest on cash deposits of more than 3%, this does not match the yield offered by tracking the European interbank rate.
Meanwhile, for most online brokers offering close to no interest on cash, XEON provides a route to keeping client cash on-platform by offering higher yields with no duration risk.
This dynamic also goes beyond online investment channels, with XEON filling a demand gap left by banks’ low-interest current accounts in Germany.
“The average new current account interest rate would be 0.38%, if you were to just put it in a certain bank in Europe and let it sit there,” Lukas Ahnert, senior passive product specialist at DWS, said.
“This essentially means XEON is 10 times more attractive than the average bank, which influences this entire inflows dynamic that we have seen.”
Reaching retail
Sceptics might question how retail investors became familiar with – let alone confident enough – to invest in an ETF capturing the ECB’s €STR lending rate; however, Öztürk suggested XEON’s traction is testament to the power of accessing retail through digital channels and online personalities.
“The product is very well-established and German retail investors understand it,” he said.
“We have tried to make a lot of noise around that product together with online brokers – some of which even created microsites for the product within their apps – but there are also many large finfluencers and financial platforms who speak about it – so that is why it got extremely popular.”
Prior to the ECB going the way of its peers with a hawkish tone, XEON was “barely visible” and had “almost no assets” coming in through digital channels.
“At some point, we noticed the numbers picked up heavily,” Öztürk continued. “Once the flows started picking up, we began proactively approaching those digital platforms.”
Rate cuts to end the hype?
Some might expect XEON’s window of prosperity to be short lived as central bankers and markets have made it be known a new epoch of ‘higher-for-longer’ will not look the same as it did pre-Global Financial Crisis (GFC).
While acknowledging a 25-basis point rate cut by the ECB is “virtually fully priced” for June, Ahnert argued XEON’s use case remains intact.
“What still matters is despite all of this, we are still a long way away from a ‘dis-inversion’ of the yield curve – it is going to remain inverted – and it will take more steps for the belly of the curve to be more attractive.
“The rate cut that is going to happen is not going to change much about the attractiveness of that product in relative value terms, versus the other options that are there.”
Instead, he suggested investors will continue to be attracted by overnight rate ETFs being the only zero duration products in DWS’s suite.
“This is a factor which makes this product successful versus a money market fund, which has a different composition, is subject to European money market fund regulation, has some exposure to commercial paper and still has around 30 days of duration.”
Ahnert said even in the event of the ECB frontrunning other policymakers on rate cuts, more conservative German retail investors would likely stay invested in XEON, rather than incur the foreign currency risk of moving to the sister US overnight rate ETF.
