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Deutsche says flows return to frontier ETFs

Deutsche Bank is expanding its emerging market exchange-traded funds, including those linked to what it views as a growth story in newly developing frontier markets.

It says its funds are attracting strong inflows again after a drying up of liquidity during the financial crisis, a sign both of renewed interest in one of the hottest sectors of recent years and of potential expansion into hitherto illiquid assets.

Exchange-traded funds are essentially tradable stocks, listed on an equity market, which track other stock indexes. They afford investors access to bourses without some of the hassles of direct investing.

Deutsche launched two frontier ETFs in early 2008 as markets around the world were being pummeled. One, linked to equities in Vietnam, started recovering at the end of last year and now has some $143.5 million in assets.

“The view was that Vietnam could be the next China”, said Manooj Mistry, Deutsche Bank's head of ETF business, in an interview with Reuters on Tuesday.

The other fund, based on the S&P Select Frontier Index, is further behind with just $27.9 million in assets. But it has recently drawn a surge in demand.

“Most of those inflows have come in the last few months,” Mistry said.

The S&P fund is populated with countries outside the emerging market mainstream that are seen as having potentially high future growth. They include Pakistan, Colombia, Nigeria, and the United Arab Emirates.

Most investors in the ETFs are institutions, but Mistry said there was also evidence of retail interest.

“You do see small trades going through (the Vietnam ETF) which indicates retail,” he said.

Mistry said that Deutsche Bank created such funds when its sales department ascertained that there was enough demand from investors. The bank is currently considering ETFs for such “frontier” places as the UAE.

In the meantime, it has expanded its more mainstream emerging market reach by launching, three weeks ago, ETFs for Indonesia and China “A” shares, the stocks primarily limited to mainland investors.

They join ETFs for Brazil, Russia, India, Korea, Taiwan and China “H” shares (those listed in Hong Kong).

The bank's biggest ETF, which tracks MSCI's main emerging market share index has increased its assets to nearly $4 billion from what Mistry said was around $1.5 billion a year ago. (Reuters)