A sound investment process and strong management team underpin Xtrackers MSCI Kokusai Equity ETF's Morningstar Medalist Rating of Silver. The portfolio maintains a sizable cost advantage over competitors, priced within the lowest fee quintile among peers.  

 The strategy's sensible investment philosophy merits a High Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained an overweight in liquidity exposure and volatility exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And high volatility exposure is rooted in stocks that have a higher standard deviation of returns. The strategy’s management team earns an Above Average People Pillar rating. The strategy's parent organization earns the firm an Average Parent Pillar rating. People Pillar and Parent Pillar ratings for this strategy are indirectly assigned by a Morningstar analyst rather than algorithmically derived. Please see the notes following each pillar section for more details. The details of assigning methods can be found in each pillar section.

Analyst Rating

Microsoft

Apple

NVIDIA

Amazon

Alphabet

Eli Lilly

Broadcom

JPMorgan Chase & Co

Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category benchmark on a risk-adjusted basis over the long term. Xtrackers MSCI Kokusai Equity ETF earns a High Process Pillar rating. The leading factor in the rating is that this fund tracks an index. Historical data, like Morningstar's Active/Passive Barometer, finds that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. The parent firm's five-year risk-adjusted success ratio of 59% also strengthens the process. The measure indicates the percentage of a firm's funds that survived and beat their respective category's median Morningstar Risk-Adjusted Return for the period. Their relatively high success ratio suggests that the firm does well for investors and that this fund may benefit from that. The parent firm's superior risk-adjusted performance, as shown by its average 10-year Morningstar Rating of 3.2 stars, influences the rating as well.

The investment strategy as stated in the fund's prospectus is:  The investment seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI Kokusai Index.  The fund will normally invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, and in the equity securities of issuers from developed markets (excluding Japan). The index is designed to track the performance of equity markets in developed markets (excluding Japan). 

 The portfolio is overweight in technology by 4.0 percentage points in terms of assets compared with the category average, and its financial services allocation is similar to the category. The sectors with low exposure compared to category peers are industrials and consumer cyclical, with industrials underweighting the average portfolio by 4.5 percentage points of assets and consumer cyclical similar to the average. The portfolio is composed of 1,267 holdings and is diversified among those holdings. In its most recent portfolio, 22.7% of the portfolio's assets were concentrated in the top 10 fund holdings, compared to the category average's 25.7%. And finally, in terms of portfolio turnover, on a year-over-year basis, 2% of the fund's holdings have changed, whether through increasing, decreasing, or changing a position.

High

Process

Xtrackers’s team is strong compared with others in the industry, resulting in an Above Average People Pillar rating. There are four managers listed on the fund: Patrick Dwyer, Shlomo Bassous, Bryan Richards, Ashif Shaikh. Experience on the team is abundant, with 17 years of average portfolio management experience. Together, they manage a total of 29 strategies, with a Silver asset-weighted average Morningstar Medalist Rating, demonstrating their potential to deliver positive alpha relative to the category median in aggregate.  

 Note: This People Pillar rating is indirectly assigned by an analyst. Morningstar analysts evaluate the People Pillar for passive products at the brand level and may also differentiate by asset class. There is at least one other passive strategy at the firm that is covered by a Morningstar analyst, so the People Pillar rating of the fund is inherited from the rating that the Morningstar analyst assigned to investment vehicles under the same brand name.

Above Average

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

Xtrackers MSCI Kokusai Equity

KOKU tracks a market cap-weighted index of large- and mid-cap developed market stocks outside of Japan.

Xtr Eurozon

Xtrackers Japan JPX-Nikkei 400 Equity ETF

ETF investors looking for international exposure may leery of the price of admission for funds around the globe. DWS offers ETFs with international exposure and extremely low cost.

News for Xtrackers MSCI Kokusai Equity ETF (KOKU)