Xtrackers Russell U.S. Multifactor ETF provides balanced exposure to a handful of time-tested risk factors and effectively diversifies risk, which should give it a leg up on the Russell Midcap Index over the long term.
This index strategy starts with the Russell 1000 Index constituents and tilts toward those with the best combination of value, quality, momentum, size, and low-volatility characteristics. Each of these factors has historically enhanced returns or reduced risk, but they are prone to slumps. Some of them—for example, quality and value—tend to excel at different times, so combining them sets the fund up for success regardless of the market environment. This approach also shields the fund from stocks that stack up well in one factor but score poorly in the rest.
Measuring stocks' factor traits holistically breeds more pronounced portfolio-level exposure than combining distinct factor sleeves. Strategies built based on a composite factor score can look a lot different from the market, but this fund sported a palatable 49% active share versus the Russell Midcap as of July 2023. Performance shouldn't wander too far from the category benchmark, but the fund has the space it needs to build an edge and recoup its competitive fee.
The fund casts a wide net that leaves it well-diversified at several levels. It ranges between 800 and 850 holdings, the top 10 of which constituted only 8.7% of the portfolio at the end of July. No sector exceeded 21% of the portfolio. And while the small-size component pulls it into mid-cap territory, the fund features most of the large- and mega-cap firms that shape the Russell 1000 Index.
Incorporating quality and low volatility into index construction gives this fund a defensive posture. From its November 2015 inception through July 2023, it posted shallower drawdowns and lower volatility than the Russell Midcap Index. Pairing that stability with competitive returns translated into a better risk/reward profile than the category index and most mid-cap blend peers.

Analyst Rating

A balanced, well-diversified multifactor fund.

Analyst

Ryan Jackson

Cardinal Health

McKesson

Cognizant Technology Solutions

CoreSite Realty

Reliance Steel & Aluminum

Marathon Petroleum

Jabil

Coterra Energy

This fund has a lot to like. Its broad reach, low fee, and balanced exposure to a diversified suite of time-tested risk factors should give this fund a more attractive risk/reward profile than the Russell Midcap Index, meriting an Above Average Process Pillar rating.

Above Average

Process

Xtrackers’ strengthening global index portfolio management operation supports a People Pillar upgrade to Above Average from Average.

Most Xtrackers funds are domiciled outside the United States, where the team that manages them has made significant strides. Julien Boulliat leads the group, a 20-person outfit that is spread across London, Frankfurt, and Hong Kong. This group is lean but not overburdened—a testament to its collective expertise and Xtrackers’ investment in top-flight technology. These factors lightened the team's workload, perhaps contributing to the solid retention rate among senior-level investment professionals.

The U.S. team is not quite as robust as its foreign counterpart. It has weathered more personnel turnover in recent years, and named portfolio managers draw on just a pair of associate portfolio managers. That said, the team has delivered on its number-one objective of high-fidelity index tracking. Plus, Xtrackers has concentrated on globalizing the team—a focus that only stands to benefit the U.S. organization.

People

In the past two years, DWS has been under heavy scrutiny from the SEC and German authorities owing to greenwashing allegations that were initially raised in August 2021 by the firm’s former chief sustainability officer Desiree Fixler. The SEC announced on Sept. 25, 2023, that it has fined DWS USD 19 million for failing to implement procedures to ensure that all investment staff members were following its environmental, social, and governance policies. This relates to funds where ESG factors were analyzed alongside other financially material factors, but where managers retained discretion over ESG outcomes. In addition, the firm was ordered to pay USD 6 million for deficiencies in its anti-money-laundering processes that were uncovered in a separate investigation. The investigation by the German authorities into the firm's ESG disclosures is still ongoing.  
The SEC findings underline that despite strong senior management commitment, it takes a considerable amount of time and resources to embed sustainability across all levels of an organization for firms without a long-standing sustainability heritage. Overconfidence and failure to deal with internal criticism adequately appear to have contributed to DWS' misleading statements on ESG matters. While it's difficult to quantify the financial damage to clients and no misstatements were detected in financial disclosures or prospectuses, we believe the firm’s shortcomings have the potential to adversely affect investor outcomes. Hence, we welcome DWS' efforts to strengthen governance around ESG integration and communicate more conservatively about its ESG capabilities.
Questionable and unsteady leadership has contributed to the DWS' woes. Previous CEO Asoka Woehrmann, who had spearheaded the firm's ESG push, stepped down in June 2022 as a result of the ESG investigations. His credibility had already been harmed following his use of personal email for business purposes and a large payment made to him by a client when he was head of Deutsche Bank's private-client business before being appointed as DWS' CEO in 2018. His successor Stefan Hoops is the firm's sixth CEO in the past 10 years, highlighting the instability in the firm's top leadership. This appointment also shows the continued influence of its parent company, even after the partial IPO in 2018. Hoops has spent most of his career at Deutsche Bank but has no asset-management background.
Despite all these negative headlines and shaky leadership, DWS has managed to remain quite stable in its investment ranks. The firm has also made strides to gain greater independence. For example, since 2020, bonuses have been linked to the firm's own performance rather than to that of the bank as a whole, which supports alignment and talent retention. Variable remuneration takes into account performance of up to five years.
DWS' vast fund lineup covers all asset classes, including passive strategies, which are offered under the Xtrackers brand. Many offerings don't distinguish themselves, but there are genuine areas of strength among active strategies, and fees are competitive across many funds. While the product development process has been streamlined, and although the firm has launched new strategies at a slower pace, lineup turnover remains a concern as a culture of asset-gathering prevails. New offerings are partly related to an expansion of ESG capabilities, but the firm is also building out its thematic equity, multi-asset, alternatives, and exchange-traded fund range. 
At this stage, we continue to believe that DWS' strengths justify a Parent Pillar rating of Average despite several weaknesses in its stewardship practices, but we will closely monitor the company for further disruption.

Average

Parent

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