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 BlackRock Inc, WisdomTree Investments Inc and Deutsche Bank AG are
among the companies starting new currency-hedged funds this year to
take advantage of a flow of some $3.9 billion into currency-hedged
ETFs so far this year.
There are now 35 U.S. listed currency-hedging ETFs managing $19.3
billion in assets, compared with only about $6.7 billion in assets
in 2011, meaning total assets in currency hedged ETFs have nearly
tripled over the past three years, according data from Lipper and
ETF.com.
A currency hedged ETF strips out the foreign currency return of a
given fund by investing in foreign currency forward contracts, and
rolling those contracts, typically on a monthly basis.
The largest asset gatherer has been the WisdomTree Hedged Europe ETF,
which since January has added about $2.6 billion, growing four-fold
to $3.5 billion.
So far, the dollar's rise has made that strategy pay off handsomely.
For example, investors who bet on Japanese stocks via the unhedged
iShares MSCI Japan ETF have lost 0.7 percent over the past three
months, as the yen sank against the dollar. Its hedged counterpart,
the iShares Currency Hedged MSCI Japan ETF, is up about 12 percent.
"Sometimes currency is not that relevant in the scheme of things,
but times like now, when currencies are moving very quickly...it can
make all the difference," said Art Laffer Jr., a Nashville
investment manager who now has about 25 percent of the global equity
strategy he runs in currency hedged ETFs.
He bought the iShares Currency Hedged MSCI Germany ETF earlier
this year and also owns the WisdomTree Japan Hedged Equity Fund.
He would hedge more of his foreign stocks portfolio if he could find
more individual country funds offering that add on, he said.
DOLLAR SURGE
The U.S. dollar soared to a seven-year high against the yen last
week and reached its highest level in more than two years against
the euro on Thursday, Nov. 6.
"We're a couple of years into a prolonged multi-year cycle" of
dollar strengthening, said Dodd Kittsley, head of ETF strategy at
Deutsche Asset and Wealth Management in New York, noting that
historically, periods of dollar strength and weakness run roughly 6
to 8 years long.
"We have a lot of conviction because of the massive divergence in
central bank policy," he said, referring to the way the Bank of
Japan and European Central Bank have signaled their intent to
further monetary policy easing, at the same time that the U.S.
Federal Reserve reigns in its stimulus program.
Deutsche has several currency hedged ETFs; its Deutsche X-trackers
MSCI EAFE Hedged Equity ETF , has nearly quadrupled in assets since
January, and now holds just under $1 billion in assets.
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Currency-hedged ETFs like these are mainly aimed at investors who
want to bet on foreign stocks; those who are less interested in
those foreign markets and just want to bet the dollar will
strengthen could buy a currency-focused ETF such as the PowerShares
DB Bullish Dollar Index Fund or the WisdomTree Bloomberg U.S.
Dollar Bullish Fund. The PowerShares Fund is up 8.13 percent so far
this year, while the WisdomTree Fund is up 5.73 percent, according
to Thomson Reuters data.
NOT ALL CREATED EQUAL
Still, while developed markets like Europe and Japan have proven to
be attractive regions for U.S. investors to currency hedge, the same
is not true of countries such as Brazil and Mexico where high
interest rates can bite into the cost of currency hedging and weigh
on returns.
"We haven't seen a lot of uptick in emerging markets currency
hedging yet," Kittsley said. "The cost of hedging tends to be a bit
more" in countries like Brazil and India, where interest rates are
higher than in the U.S. The cost of currency hedging is roughly akin
to the spread in interest rates between an investor's home country
and the country where the currency is being hedged.
In Europe and Japan, where the interest rate differential is much
smaller, the cost is trivial. In fact, with foreign interest rates
lower than in the United States, investors can actually be paid
slightly for the hedge when going from the euro or yen to U.S.
dollars.
That's why Omaha-based Scott Kubie of CLS Investments, a registered
investment advisory firm with more than $6 billion in managed
assets, has decided to stay in Japan and developed Europe with his
currency hedged ETFs.
"It makes more sense to do currency hedging in Europe and Japan than
it does in emerging countries," said Kubie, who owns the iShares
Currency Hedged MSCI Japan ETF and Deutsche X-trackers MSCI Europe
Hedged Equity ETF.
About 20 percent of the international exposure in his portfolio is
now currency hedged, said Kubie. "I would see us increasing it over
time."
(Reporting by Ashley Lau in New York; editing by Linda Stern and
John Pickering)
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