Q: Could you explain your investment philosophy?

A: According to modern portfolio theory, diversifying the portfolio into low-correlation buckets lowers the overall risk. We believe that the commodities represent a very attractive investment for money managers who want to diversify their holdings, and we have seen a large inflow into commodities in the past years.

There is academic research that deals with commodity returns over the years, such as the paper “Facts and Fantasies About Commodity Futures,” by K. Geert Rouwenhorst and Gary Gorton. The paper proves that investments in commodities with a long allocation provide S&P-like returns with very low correlation to equities. That’s opposite to the common belief that commodities are mean-reversion instruments, or a “zero-sum” game, where no real returns can be gained. Overall, for most investors it is recommended to look for 1% to 5% exposure to the commodities sector.

At Deutsche Bank, we bring investment tools that provide a very cheap and efficient access to commodities. Over the long run, our products move very much in line with the commodities they track. Until two years ago, you could not buy such products on the exchange. If you wanted to invest in commodities, you had to do it indirectly, through owning the equities involved in the sector. The other possibility was to open a futures account, which is quite difficult for most investors.

Q: What are the core features of the PowerShares Deutsche Bank commodity products?

A: We launched the first of our 11 commodity exchange traded products in 2006. These products provide either a broad exposure to different commodities through our commodity index, or sector investments in energy, metals, agriculture, etc. The products have been very successful and, over the last two years, have attracted approximately $4.5 billion across our platform. The investors were well rewarded for investing in the sector as most commodities, with the exception of base metals, garnered solid returns in 2007.

These products were the next logical step after our long commodity funds, and we brought them in a note structure, not in a fund structure. They provide short or inverse exposure to the commodities, as well as leveraged exposure. For instance, in gold we recently brought DB Gold Double Short ETN, which gives two times the inverse movement of gold.

Another product, the DB Gold Double Long ETN, gives twice the positive move of gold for the investors who were still very bullish on the asset class and wanted to increase their exposure. Also, the investors who like their long exposure, recognize that going into a double long product can cut your asset capital investment in half. Basically, you get the same return for half of your capital allocation.

That philosophy refers to the short side as well. The inverse product allows investors to take the inverse view in a much simpler way than short-selling the ETFs. If you short sell an ETF, you need a margin account and your dealer has to locate a borrower. Sometimes ETFs are hard to borrow once you are short, and once you have borrowed, there is no guarantee that it will not be recalled. It is often complicated to short sell ETFs, and through our short products, we have given investors a simpler way to take a bearish view on these sectors.

Q: Can you explain the difference between ETN and ETFs in terms of structure?

A: They are both exchange-traded products and the ETNs offer the benefits that people have appreciated in the ETFs. They have intraday liquidity and are very cost effective compared to other wrappers. There is tremendous price transparency at any point in the day versus the underlying asset. So, there isn’t a lot of distinction between the two products in terms of look, feel, and trading capability.

The difference is that the ETNs always guarantee the index returns, while some ETFs have a tracking error. The flip side is that with an ETN you take the credit risk of the issuer as the ETNs are issued off the shelf platform from a major financial institution or a bank. We use the Deutsche Bank shelf, which has an S&P rating AA- and Moody’s rating of Aa1.

Another distinction between the funds and the notes is related to tax reporting. With some fund structures set as partnerships, especially in commodities and currencies, we can give you a K-1 for your tax reporting. At the same time, the ETNs are going to be 1099 issuers, and some people with taxable accounts prefer the 1099 reporting over the K-1.

Q: How are these individual products designed? What can the products in agriculture, for example, deliver to the investor?

A: We were the first in the U.S. market with exchange-traded agriculture product that referenced futures contracts, not the basket of equities in the food industry. Our agriculture ETF is a basket of wheat, corn, soybeans, and sugar, where each of them represents 25%, and we rebalance back to the 25% every November. This product has already reached $1.2 billion in assets.

An investment in PowerShares DB Agriculture Fund (DBA) represents a movement in the agriculture futures plus an underlying three-month T-bill yield on investments. We brought four agriculture notes in April: a single long, a double long, a single short, and a double short product. Both the ETF and the ETNs reference to the same basket of agricultural products.

The DB Agriculture Long is similar to the DBA, only in a note form. That product will always give you the index, knowing the tracking error, but gaining back to the point you take the credit risk of the issuer.

We also brought DAG, our agriculture double kong ETN, which gives one time the T-bill move and two times the agriculture move. If the basket of agriculture products is up 3% in one day, you would expect the DAG to move up 6% in that day. Overall, it provides twice the movement of the underlying basket. However, if agriculture is down 3% in a day, the DAG will probably be down 6% that day. Leverage is a doubleedged sword, so the product amplifies your returns both on the upside and on the downside.

If you have a bearish view on agriculture, we also have a single short product. If the basket of agricultural products is up 3% in a day, you will be down 3% that day. Conversely, if the basket is down 3%, you will be up 3%. Therefore, the product gives the inverse movement of the basket. Our amplified version of that product, the DB Agriculture Double Short ETN, should be up 6% that day.

We have developed the inverse and the leveraged agriculture ETNs due to demand from both retail and institutional investors, who use them as tools to portray their views on agricultural movements.