Deutsche Asset & Wealth Management has revealed plans to convert a range of its synthetic db X-trackers exchange-traded funds to physical products.

Deutsche Asset & Wealth Management, the investment management arm of Frankfurt-headquartered Deutsche Bank, has revealed plans to convert a range of its synthetic db X-trackers exchange-traded funds to physical products.

The 18 swap-based ETFs will be converted into physically replicated products, between 6 January 2014 and 30 June 2014, becoming what DeAWM calls “direct replication” ETFs, the firm said in a statement.

As opposed to synthetic products, physical ETFs do not use derivatives to achieve reference index exposure. Instead, they physically hold underlying index constituents.

The conversions are expected to take total assets under management in direct replication db X-trackers ETFs to approximately €9.5 billion ($13 billion), making DeAWM the second largest provider of physical ETFs in Europe after Blackrock’s iShares platform.

“In recent years, there has been a marked preference among investors for the physically replicated ETFs – a preference borne out in asset flows, with recent inflows into physical ETFs far exceeding inflows into synthetic equivalents,” said Reinhard Bellet, DeAWM’s head of passive asset management when commenting on the move.

Investors’ concerns about swap-based ETFs are generally based on the risk associated with the counterpart, namely the risk that a swap counterparty, herein the bank itself, Deutsche Bank, will default on its obligations. As such, other platforms have moved to convert their synthetic ETF’s to physical products, which enjoy greater investor confidence in the current market. For example, DeAWM’s Paris-based rival Lyxor, owned by Societe Generale, recently converted a number of synthetic ETFs in a similar move.

The investment objective and the relevant reference index of the 18 Deutsche funds will remain unchanged, and the ETFs will not bear any of the costs associated with the conversion, the firm said.

As at 30 June 2013, DeAWM had €946 billion (about 1.298 trillion) in assets under management.