HardAssetsInvestor

An Interview With Kevin Rich

Deutsche Bank's Kevin Rich talks with HardAssetsInvestor.com about DB's new commodity exchange-traded products.

• ETNs vs. ETFs
• Optimized rolling strategy
• Making hedging easier

As the head of Deutsche Bank's Currencies and Commodity ETF effort, Kevin Rich has been at the forefront of efforts to make exchange-traded commodity products available to all investors. The PowerShares DB Commodity ETF (DBC) was the first in the U.S., and is still one of the largest broad-based commodity ETFs in the world.

Recently, Deutsche Bank has added a new innovation to its lineup: commodity ETNs that offer leveraged and short exposure to the commodities market. Rich spoke with the editors of HAI about the new products.

HardAssetsInvestor.com (HAI): What drove the decision to launch ETNs?

Kevin Rich (Rich): We've been developing exchange-traded funds for a number of years, and we know that people love ETFs for a few basic reasons: They are very transparent, they trade close to their net asset values and they offer exposure to important parts of the market.

When we saw ETNs come to market, we wanted to see if they would share those same features, and they did. ETNs have traded with tight bid/offer spreads in the intraday market, and investors are finding them useful. So we started looking at ETNs linked to variations of the same index our ETFs track, the Deutsche Bank Liquid Commodity Index.

HAI: How should an investor choose between an ETF and an ETN?

Rich: Investors should first consider which asset class they would like to access. The question of ETF versus ETN is similar to the question of ETF versus mutual fund. It's a question I hear all the time, but it's not the most important question investors should ask.

From there, investors can look at the index used to access that asset class. Not all indexes are created equal. That's especially true in commodities, given the issue of roll yield and contract selection. We believe that DBC and its optimized rolling strategy offer the best return, but the choice of one commodity index over another is an important choice either way. Once they've answered these basic questions, then investors can think about which vehicle is best for their needs.

HAI: So what are the advantages and disadvantages?

Rich: One advantage that ETNs have over ETFs is that there is no tracking error. A number of ETFs have large tracking error.

There may also be tax differences - for instance, some people don't like getting K-1s for tax purposes, and certain commodity ETFs give out K1s. All ETNs have 1099 reporting.

On the other side, where ETFs have an advantage over ETNs is that ETNs come with credit risk from the issuer. If the bank issuing the ETN defaults, that's a problem.

Part of the reason that Deutsche Bank offers both ETFs and ETNs is that both products offer good features for investors, and each investor has their own set of criteria. Some people couldn't care less about credit risk because they will monitor their ETN investments closely, they know there is a liquid intraday market and they know they can get out of the position any day they want. Other people care deeply about credit risk, and for those people, ETFs are a better choice.

HAI: Who is using ETNs vs. the ETFs?

Rich: So far, there's been a little bit more trading volume in the ETNs vs. the ETFs on a relative basis; a little bit more in-and-out. But it's too early to tell.

HAI: Why leveraged funds?