Hedging Bonds

I have for some time as a modest hedge for my bonds had a position in XUGS, an ETF issued by Deutsche AM as a way to short gilts, indeed the only one available for this purpose, as far as I knew. Now, right at the bottom of the interest rate cycle, and therefore at the lowest price , I have been told by my SIPP broker that XUGS is no longer traded. No advance warning was given to me. Deutsche state that the announcement was made on their website, and from there " communicated to the exchanges" - well, it certainly did not go from there to my broker and me. I am now faced with accepting whatever NAV is getting paid as published on Sept. 6th. There a several disturbing aspects about this: at a time when most needed ( gilts and other government bonds so absurdly expensive) there appears to be no longer an exchange traded gilt product to reflect this belief. Also, where was the mechanism for a timely warning to exit the position? Finally, if it happened here, it may happen with all sorts of other ETFs/ETCs where none of us may be aware of the small print allowing issuers to shut them down when it suits them but not you. So once again buyer beware..

Comments

  • Fang, thank you.

    I'm in the same boat and had logged on to say more or less what you have said.

    I regarded my holding as I would an insurance policy, accepting the increasing paper loss as I would an insurance premium. As you point out, we may finally be at a turning point when such protection pays out. It is as if I had paid the premiums and the insurer had pulled out during the term of the policy !

    I spoke to someone at DB yesterday who gave me to believe they were at liberty to terminate the product without warning or consultation. Evidently, they review all their ETF funds periodically and terminate one's which are unprofitable. XUGS is one of five ETFs to go this time round.

    However, they had given some notice, which should have allowed holders to sell into the market if they had wished. I was told that 'Custodians' ( whoever they are ) were informed on 29 July.
    Thursday ( 1 Sept ) was the first I knew anything about it, when I was advised that the ETFs concerned would be terminated wef 6 Sept, and that dealing had been suspended from 8am on 30 August.

    As well as the issue of notice, I would question whether financial regulations permit the closure of an ETF to be undertaken arbitrarily in this way, and without alternative options or compensation being offered.

    If so, I would question whether providers and brokers are adequately warning retail investors of the risks of investing in such funds.

    Hope this helps. Will be interested to hear what others have to say.... Robin
  • Good to know, Robin, that I am not the only one getting stung by this. I am a subscriber of the Investors Chronicle, so will let them know, as they frequently feature ETFs. FT will also be informed; the more of this gets out to the media, the better for all of us in the long run. DB issued ETFs I will no longer touch.
  • Fang, I doubt whether DB are the only ones. I am going to try and find out from the FCA whether there are grounds for a complaint. It will be interesting to see what emerges on Tuesday ( Sept 6 ), with regard to redemption

    I would have thought there were more contributors to the Forum than just the two of us who are affected by this.
    db x-trackers 11 UK Gilts Short Daily ETF to give XUGS its full title was the subject of a bond of the week, posted by Mark Glowrey, 13 December 2011.
    His conclusion: 'I regard this instrument in the same manner as a fire extinguisher. I hope not to have to use it .... It may yet come in useful'

    Finally, I see there are other hedging instruments of this ilk e.g 3GIS, ... though it may be a case of out of the frying pan into the fire.
  • As to redemption price, would expect it to be in the mid of bid/offer per end of August. Quote appeared to be 8183 to 8197. Anything below 8183 would be yet another proof of their grasping intent.
  • The price at the close on 29 July appears to have been 8444.50 subsequently rising to 8476 on 1 August , the first opportunity to sell, then rising to 8516 on 3 August.
  • So they have terminated other bond ETFs too, supposedly on grounds of illiquidity/lack of interest. Leaves therefore entirely the ball in their court, how very convenient. That must therefore be a warning to all of us considering to purchase a financial construct that may eventually not meet the issuer's criteria, whatever they might be.
    Have raised the issue as official complaint with my broker, on grounds of not having been informed of the impending closure. IC will also look into the termination, but as to FCA, not holding my breath as DB most probably stayed within the rulebook.
  • Gathered from the FCA that DB are within their rights to withdraw the product, provided they give ' reasonable notice ', and act within the terms and conditions of the contract.

    As you say, Fang, buyer beware ! It would never have occurred to me that the size of the sub-fund would in itself constitute a risk, coming as it does under the umbrella of a massive bank. I feel this should be pursued, the lack of advice with regard to the risks. It will be interesting to see if IC come up with anything.

    Have now raised the issue of notice, and loss of opportunity to sell into the market, as an official complaint with my broker.
  • Have done same with mine, Robin, no reply yet. Note the following " key risk factors" statement on DB x-trackers II UK Gilts Short Daily ETF:" Investors should be aware that DB Affiliates may from time to time own a significant amount or proportion of the overall holdings in a Sub-Fund. A reduction in the holding of DB affiliates may result in (a) a reduction in the Net Asset Value of the relevant Sub-Fund to below Minimum Net Asset Value which might result in the closure of the Sub-Fund or (b) an increase in the holding proportion of the other Shareholders in the Sub-Fund beyond those allowed by applicable laws or internal guidelines. Shares purchased on the secondary market cannot usually sold directly back to the ETF. So there we have it: the decision to close an ETF is pretty much controlled by the issuer and his "affiliates". It would further more appear to be vital that we as retail buyers are kept informed b y our broker as to forthcoming closure dates, so that we can sell beforehand ( but who would want to buy a fast expiring product?). Finally, one must not buy any of these ETFs in whatever market without being fully aware of the risks, some of them clearly outside our control.
  • End of DB AM quote, btw, after "sold directly back to ETF."
  • DB have responded to my contact last week. Relevant points:

    The final NAV calculation is 82.4450 GBP.... payment takes place within 10 working days, from Sept 6th.

    The BOD... 'deemed it appropriate to terminate the ETF because it demonstrated a sustained low level of demand and over the last three years the assets of the ETF were below the threshold specified in the prospectus'.

    'End investors ( non-registered shareholders ) who purchased the ETF via the secondary market are dependent on (i) viewing notices on any of the publication channels set out above ( such as the London Stock Exchange website ) or ( ii ) their broker or custodian bank forwarding on any relevant notices received'.

    ' Informing individual investors about the termination who are not registered shareholders of the ETF is outside of our control'
  • Thank you for letting me know. The IC is on the case, will address this topic shortly. The explanation by DB as to termination does not fall foul of covenants, but still think it suspicious that it was closed at the lowest price point. They or their "affiliates" may have conceivably done very nicely out of this timing. You may have noticed that US T bond tumbled today, perhaps a turn or correction in longer maturies is finally taking place. Issuers certainly seem to think so, witness the large volume of new bonds in Euros & Dollars this month, albeit not much in Sterling. Fear that sterling issuance will in any case become increasingly a side show, with Brexit accelerating the process. As to ETFs, especially of the inverse variety, treat with caution.
  • edited September 2016
    This ETF's objective was to track the performance of the Underlying Asset, which is the DEUTSCHE BANK SHORT DAILY GBP GILTS TOTAL RETURN INDEX.

    DEUTSCHE BANK can see a sell off looming when USA tightens and don't want to pay out.

    Deutsche Bank also has the reputation of being the worlds riskiest bank.

    It's a Financial Iceberg, all the risks are hidden from view but the markets are heading straight for it

    http://money.cnn.com/2016/07/27/news/companies/deutsche-bank-profit-slump/

    I would avoid anything to do with Deutsche Bank assets or product offerings
  • Agree, Morgleman. DB ETFs not to be touched with a barge pole in future. Gilt price move during last few days proves the point.
  • Adding insult to injury, after depriving UXUGS buyers of their hedging tool, DB are now proclaiming the end of the 35 year bull market in bonds:
    http://www.marketwatch.com/story/deutsche-bank-says-35-year-party-is-over-for-bond-bulls-2016-09-09?siteid=rss
  • I held this etf for a short period before selling and buying Artemis Strategic Assets which has large shorts on international government debt which I thought was a better option. This is the one of only two funds I have in my portfolio and accounts for just 2%; to be honest it's been a bit of a dog. However, I note yesterday it rose over 1% while most funds fell. You might consider this as an immediate option to get you back into the market. Today's FT 'Long view' is worth a read but you need to take up subscription. It mentions German government debt moving into positive rates for the first time for a while and perhaps we are now at the bottom? Of course if the Fed doesn't raise rates later in the month rates may turn negative again - who knows?!?!?!
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