Win-Wins: What is the Scalable Capital - Xtrackers ETF?

Exchange Traded Funds (ETFs) have revolutionised the investing / trading landscape. They are low cost, diversified and easily accessible instruments that is a “win-win” — a rare occurrence in the world of finance. An even rarer occurrence is an ETF partnership…

Scalable Capital (a German neobroker) and DWS (an asset manager who owns the Xtrackers brand) has entered into a partnership in Dec 2024 to launch an ETF together. In theory, this would be a “win-win-win”, where:

• Retail investors get a good product
• Scalable Capital grows its business
• DWS gets more assets

How I imagine the call between DWS and Scalable Capital went down

Let’s dive deeper into this product and explore why this actually makes sense for all parties.

Retail investors get a good product: Why?

The Scalable Xtrackers ETF is an innovative product that gives investors easier access to more returns at a very small additional risk.

Users can get more returns because of the use of swaps (a derivative). This is a legal, compliant loophole that allows non-US investors to bypass dividend withholding taxes, thus getting a better return. This is what happens in a nutshell:

• FinTechNomad USA holds a lot of US stocks — they enter into a total return swap agreement with DWS
• DWS will post their European stocks (or other assets) as collateral, and receive S&P500 net returns (excludes withholding taxes) in cash
• Depending on the deal, a swap fee will also need to be paid and in some situations DWS will also provide net returns on, say, MSCI Europe index to FinTechNomad — a “win-win”

This is the reason why ETFs that track the same index, say the S&P500, will have better returns if they use swaps instead of physical replication (actually buying the real stocks that make up the index). The only additional risk you are taking here is counterparty risk, what if FinTechNomad USA goes bankrupt? Luckily, most swap ETFs hold more than 100% of the fund assets in collateral to act as a buffer, hence the risk is minimalised. Additionally, the Scalable Xtrackers ETF also uses swaps to get access to some Chinese stocks, gaining access to a larger slice of the Chinese equity market and more diversification.

Courtesy of JustETF

This ETF makes it easier for retail investors to implement a swap-based strategy that yields higher returns because Scalable and DWS package this into one single fund. You could theoretically replicate the same returns using different funds, but you would need to constantly rebalance and eat the transaction costs. This all-in-one, hybrid ETF is the first-of-its-kind in the European ETF market.

Scalable Capital grows its business: How?

This ETF can leverage the brand strengths of both Scalable and DWS to get more users into Scalable Capital’s door. Although the management fee is discounted at the fund level and every investor should benefit from this no matter where they invest from, 0% fees is still a very strong marketing campaign — this would get new users and existing users to invest more for sure.

Additionally, once the promotional period is over, Scalable Capital’s existing revenue share partnership with DWS can also grow. They currently have commission-free purchases of DWS Xtrackers ETFs on their platform. For simplicity and practically, I would assume Scalable Capital receives a portion of management fees on the additional Assets Under Management brought in after the deal is signed.

DWS gets more assets: When?

Currently (4 Apr 2025), this fund has a total assets under management of 160M EUR which is pretty decent in its first quarter of launch. However, this is barely enough to keep the fund running and less than 1% of Scalable Capital’s last known assets under custody (20bn EUR — 15 Apr 2024).

With a lower fee (0.17% after the promotional period) and potential for better returns, it’s in a good position to take market share away from Blackrock’s iShare ETF that physically replicates the same MSCI ACWI index (currently 17 billion EUR). Taking just a billion in assets away from Blackrock would already 5–7x the existing assets under management, which is a very realistic target.

Not sure when that day will come, but I’m pretty certain that Blackrock, who also runs a few swap-based ETFs, will be launching a similar product to counter this.

Conclusion

In theory, this triple win sounds amazing. However, even though users are getting a good product right now, there’s still a lot of work for both Scalable Capital and DWS to do to grow this fund’s assets under management. Retail Investors tend to invest in ETFs that other people are talking about, and today, most people talk about Blackrock and Vanguard ETFs still. It may be beneficial to raise awareness of this specific ETF through marketing and for Scalable Capital to actually offer a real incentive for users to invest in this ETF, otherwise this ETF may just be another fund in this large ETF universe…