The Mighty U.S. Dollar Why Investors May Consider Rethinking International Allocations

International/ Global Equity

The mighty U.S. dollar Why investors may consider rethinking international allocations

When left unhedged, currency exposure can have potentially negative effects on both the risks and returns of an investor’s international portfolio. With Deutsche Bank forecasting the U.S. dollar to appreciate against other major currencies through 2018, U.S. investors with international allocations may continue to see their returns eroded in the near term and overall risk elevated in the long run, all due to the currency effect.

Confront your currency risk Since 1992, foreign currency exposure within international equity allocations has added to overall risk and affected returns. Currency-hedged investments seek to minimize both exposure to currency fluctuations and the potential for additional portfolio risk.

Average annual returns Standard deviation (12/31/92–3/31/17) (12/31/92–3/31/17)

55 bps 20.92% 6.55% 180 bps 6.00% 19.12% Minimizing currency exposure led to …and a 9% reduction a 9% increase in volatility. in total returns…

Hedged Diﬀerence Unhedged Hedged Diﬀerence Unhedged

Source: Morningstar as of 3/31/17. Past performance is no guarantee of future results. It is not possible to invest directly in an index. Unhedged developed international equities represented by MSCI EAFE Index. Hedged developed international equities represented by MSCI EAFE U.S. Dollar Hedged Index. Standard deviation is often used to represent the volatility of an investment. It depicts how widely an investment’s returns vary from the investment’s average return over a certain period. Bps is basis points; one basis point equals 1/100 of a percentage point. Currency shifts have already begun chipping away at returns

Currency effects on international returns can be significant Over the past few years, investors have felt the pain of negative currency movements. In fact, most hedged indexes have outperformed their unhedged counterparts over the past one-, three-, five- and 10-year periods. Investors solely targeting exposure to international equities, without the added currency factor, may want to consider a currency-hedged approach.

Hedged index returns have outpaced their unhedged counterparts (annualized returns as of 3/31/17)

1-year 3-year 5-year 10-year

Hedged Unhedged Hedged Unhedged Hedged Unhedged Hedged Unhedged Index return return return return return return return return MSCI EAFE Index 18.91% 11.67% 7.43% 0.50% 10.82% 5.83% 2.73% 1.05% MSCI Europe Index 21.04% 9.76% 7.48% –1.51% 10.76% 5.63% 3.72% 0.70% MSCI EMU IMI Index 21.44% 12.29% 8.35% –0.86% 12.55% 7.09% 2.93% — MSCI ACWI ex-USA Index 17.36% 13.13% 6.27% 0.56% 8.57% 4.36% 2.73% 1.35%

Source: Morningstar as of 3/31/17. Past performance is no guarantee of future results. Performance for other time periods may not have been as favorable. Index returns do not include dividend distributions and do not reflect fees or expenses. It is not possible to invest directly in an index. See page 6 for index definitions. Hedged indexes are designed to mitigate the exposure to fluctuations between the value of the U.S. dollar and non-U.S. currencies, potentially allowing for purer exposure to international equity markets.

Trends of the U.S. dollar Historical U.S. dollar cycles last an average of six to 10 years. Rather than attempting to time bull and bear U.S. dollar trends, investors seeking pure international equity exposure may want to minimize exposure to foreign currencies.

U.S. Dollar Index (2/28/73–3/31/17)

175 5 years 7 years 10 years 7 years 10 years6 yrs. +101% 150

125 +50% +36% 100

75 –18% –51% –39% 50 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2017 U.S. Dollar Index (DXY) historical performance Current level

Source: Bloomberg as of 3/31/17. Past performance is no guarantee of future results. For illustrative purposes only. The U.S. Dollar Index measures the foreign exchange value of the U.S. dollar compared to the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. Cycle end percentages represent cumulative USD index performance changes.

The mighty U.S. dollar 2 Hedging currency has often lowered overall risk with minimal costs to hedging

With the same equity exposure and international equity diversification benefits as their unhedged counterparts, currency-hedged strategies have not only produced higher returns over the long term, but have historically offered lower risk.

Five-year standard deviation, hedged vs. unhedged indexes (4/1/12–3/31/17)

16.89% 15.33% 14.37% 14.86% 13.21% 12.93% 11.06% 11.18% 10.46%

olatility 9.95% V

MSCI MSCI MSCI Emerging MSCI MSCI Germany Europe Index EAFE Index Markets Index ACWI ex-USA Index Hedged Unhedged

Source: Morningstar as of 3/31/17. See page 6 for index definitions. Volatility represented by standard deviation.

The cost of hedging is largely driven by interest-rate differentials: If U.S. dollar rates are higher than those of the foreign currency being shorted, investors earn the difference between the two rates. If U.S. dollar rates are lower, investors pay the difference. Due to near-zero interest rates internationally, investors are currently paid to hedge many developed market currencies.

Estimated annualized cost of carry for various currencies

2.05% 1.62% 1.46% 0.44% Cost to hedge 0.85% 0.38% –0.64% Paid to hedge

Swiss franc Euro Japanese yen British pound Korean Norwegian Australian won krone dollar

Source: Deutsche Asset Management, Bloomberg as of 3/31/17. The cost of currency hedging can be calculated using the “forward exchange (FX) rate” of a currency forward contract, which is primarily determined by the current FX spot exchange rate and the interest-rate differential between two currencies.

The mighty U.S. dollar 3 The future impact of currency risk may be significant

U.S. dollar positioned for dominance over the coming years Deutsche Bank remains one of the top leaders in Foreign Exchange (FX). We seek to harness these global strengths and resources from across the bank to deliver thoughtful and innovative investment opportunities. Our currency forecasts indicate that the current U.S. dollar strength may continue.

Deutsche Bank forecasts significant U.S. dollar strength against most G10 currencies

Spot Q2 % change Q3 % change Q4 % change % change USD-rates price 2017 vs. USD 2017 vs. USD 2017 vs. USD 2018 vs. USD EUR/USD 1.05 1.00 –4.8% 0.98 –6.7% 0.95 –9.5% 1.00 –4.8% USD/JPY 114 119 –4.2% 122 –6.6% 125 –8.8% 115 –0.9% GBP/USD 1.23 1.14 –7.3% 1.09 –11.4% 1.06 –13.8% 1.18 –4.1% USD/CHF 1.01 1.04 –2.9% 1.02 –1.0% 1.05 –3.8% 1.05 –3.8% AUD/USD 0.76 0.74 –2.6% 0.72 –5.3% 0.68 –10.5% 0.65 –14.5% NZD/USD 0.71 0.70 –1.4% 0.70 –1.4% 0.68 –4.2% 0.65 –8.5% USD/CAD 1.34 1.38 –2.9% 1.39 –3.6% 1.40 –4.3% 1.30 3.10% USD/SEK 9.08 9.39 –3.3% 9.51 –4.5% 9.74 –6.8% 8.75 3.80% USD/NOK 8.48 8.90 –4.7% 8.98 –5.6% 8.95 –5.3% 8.00 6.00% Source: Deutsche Bank as of 3/6/17. EUR=euro; JPY=Japanese yen; GBP=British pound; CHF=Swiss franc; AUD=Australian dollar; NZD=New Zealand dollar; CAD=Canadian dollar; SEK=Swedish krona; NOK=Norwegian krone; USD=U.S. dollar. To ensure calculation of foreign currency depreciation across all currencies, all percent changes vs. USD are based on crosses reflected in terms of foreign currency-over-USD rates.

Currency forecasts point to potentially significant declines in international returns If currency forecasts are realized, the impact on international returns could be sizable. The U.S. dollar is expected to strengthen vs. multiple major currencies through 2018, potentially resulting in double-digit declines across a variety of international indices. The chart below shows a breakdown of the potential impact on unhedged index returns based on Deutsche Bank’s currency forecasts through 2018 and the weight of each currency within the respective index.

Future currency impact potential

–3.7% –3.8% –0.9% –4.8% –4.1% –6.5% –2.4% –8.9% –9.5% –8.8% –9.5% –13.8%

MSCI EAFE MSCI Europe MSCI Japan MSCI Germany MSCI U.K. MSCI All World ex-USA 2017 2018

Source: MSCI and Deutsche Bank. The potential impact on unhedged index returns is based on 1) Deutsche Bank’s available currency forecasts through 2018 as of 3/6/17 and 2) the currency weighting, where applicable, for the euro, British pound, Japanese yen, Australian dollar, New Zealand dollar, Canadian dollar, Swedish krona, Norwegian krone and Swiss franc within each MSCI index, as of 3/31/17. See page 6 for index definitions. Assumes no cost of carry or cost of trading. For illustrative purposes only. Values based only on currency moves and do not incorporate gains or losses associated with equity movements.

Opinions, estimates and projections in this report constitute the current judgment of the author as of the date of this report and are subject to change.

The mighty U.S. dollar 4 Deutsche international equity currency-hedged strategies

— #2 in overall FX1 — Best bank for FX spot2

Using our bank-wide FX expertise, Deutsche Asset Management delivers a variety of currency-hedged strategies designed to best suit our investors’ needs.

ETFs NYSE ticker Deutsche X-trackers CSI 300 China A-Shares Hedged Equity ETF ASHX Deutsche X-trackers MSCI Asia Pacific ex Japan Hedged Equity ETF DBAP Deutsche X-trackers MSCI All World ex US Hedged Equity ETF DBAW Deutsche X-trackers MSCI Brazil Hedged Equity ETF DBBR Deutsche X-trackers MSCI EAFE Hedged Equity ETF DBEF Deutsche X-trackers MSCI Emerging Markets Hedged Equity ETF DBEM Deutsche X-trackers MSCI EAFE Small Cap Hedged Equity ETF DBES Deutsche X-trackers MSCI Europe Hedged Equity ETF DBEU Deutsche X-trackers MSCI Eurozone Hedged Equity ETF DBEZ Deutsche X-trackers MSCI Germany Hedged Equity ETF DBGR Deutsche X-trackers MSCI Italy Hedged Equity ETF DBIT Deutsche X-trackers MSCI Japan Hedged Equity ETF DBJP Deutsche X-trackers MSCI South Korea Hedged Equity ETF DBKO Deutsche X-trackers MSCI Mexico Hedged Equity ETF DBMX Deutsche X-trackers MSCI Southern Europe Hedged Equity ETF DBSE Deutsche X-trackers MSCI United Kingdom Hedged Equity ETF DBUK Deutsche X-trackers MSCI All World ex US High Dividend Yield Hedged Equity ETF HDAW Deutsche X-trackers MSCI Emerging Markets High Dividend Yield Hedged Equity ETF HDEE Deutsche X-trackers MSCI EAFE High Dividend Yield Hedged Equity ETF HDEF Deutsche X-trackers MSCI Eurozone High Dividend Yield Hedged Equity ETF HDEZ Deutsche X-trackers Barclays International Corporate Bond Hedged ETF IFIX Deutsche X-trackers Barclays International Treasury Bond Hedged ETF IGVT

1 Euromoney FX survey as of May 2015. 2 FX-Week Best Banks Awards as of November 2015.

The mighty U.S. dollar 5 Definitions:The MSCI All Country World Index (ACWI) ex-USA tracks the performance of 22 developed and 23 emerging markets. The MSCI EAFE Index tracks the performance of stocks in select developed markets outside of the United States. The MSCI Emerging Markets Index tracks the performance of stocks in select emerging markets. The MSCI Europe Index tracks the performance of 15 developed markets in Europe. The MSCI European Economic and Monetary Union (EMU) Index tracks the performance of stocks in 10 developed market countries, including Austria, Belgium, Finland, France, Germany, Ireland, Italy, the Netherlands, Portugal and Spain. The MSCI Japan Index tracks the performance of Japanese stocks. The MSCI United Kingdom Index tracks the performance of U.K. stocks. The MSCI Germany Index tracks the performance of German stocks. The hedged version of each index is designed to provide exposure to equity securities in each listed region/country stock markets (listed above), while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and selected non-U.S. currencies.

Nothing contained herein is investment advice nor shall it be relied upon as such. If an investment is made with any Deutsche Bank AG affiliate, it is acknowledged that we are not providing investment advice of any kind, nor are we acting in any fiduciary capacity.

Risk information: Deutsche X-trackers ETFs: Investing involves risk, including the possible loss of principal. Stocks may decline in value. Foreign investing involves greater and different risks than investing in U.S. companies, including currency fluctuations, less liquidity, less developed or less efficient trading markets, lack of comprehensive company information, political instability and differing auditing and legal standards. Emerging markets tend to be more volatile than the markets of more mature economies, and generally have less diverse and less mature economic structures and less stable political systems than those of developed countries. The fund’s use of forward currency contracts may not be successful in hedging currency exchange rates changes and could eliminate some or all of the benefit of an increase in the value of a foreign currency versus the U.S. dollar. Funds investing in a single industry, country or in a limited geographic region generally are more volatile than more diversified funds. Investing in derivatives entails special risks relating to liquidity, leverage and credit that may reduce returns and/or increase volatility. Performance of the fund may diverge from that of the underlying Index due to operating expenses, transaction costs, cash flows, use of sampling strategies or operational inefficiencies. An investment in this fund should be considered only as a supplement to a complete investment program for those investors willing to accept the risks associated with the fund. See the prospectus for details. Shares are not individually redeemable, and owners of Shares may acquire those Shares from the Fund, or tender such Shares for redemption to the Fund, in Creation Units only. MSCI is a servicemark of MSCI Inc. (MSCI) and has been licensed for use by DBX. The funds are not sponsored, endorsed, issued, sold or promoted by MSCI nor does MSCI make any representation regarding the advisability of investing in the funds. Obtain an ETF prospectus: Carefully consider the funds’ investment objectives, risk factors and charges and expenses before investing. This and other important information can be found in the funds’ prospectuses, which may be obtained by calling1-855-329-3837 or by viewing or downloading a prospectus at www.deutsche-etfs.com. Read the prospectus carefully before investing. Obtain a mutual fund prospectus: To obtain a summary prospectus, if available, or prospectus, download one from deutschefunds.com, talk to your financial representative or call (800) 728-3337. We advise you to carefully consider the product’s objectives, risks, charges and expenses before investing. The summary prospectus and prospectus contain this and other important information about the investment product. Please read the prospectus carefully before you invest.

Investment products: No bank guarantee | Not FDIC insured | May lose value

Deutsche X-trackers ETFs (“ETFs”) are managed by DBX Advisors LLC (the “Adviser”), and distributed by ALPS Distributors, Inc. (“ALPS”). The Adviser is a subsidiary of Deutsche Bank AG, and is not affiliated with ALPS. Deutsche Asset Management represents the asset management activities conducted by Deutsche Bank AG or any of its subsidiaries. Investment products offered through Deutsche AM Distributors, Inc. Advisory services offered through Deutsche Investment Management Americas, Inc.

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