Growing Appeal of Currency Hedging

Back in 2009, WisdomTree developed its first Index that was designed to hedge the performance of developed market currencies in a developed world, MSCI EAFE-like universe1. While the concept of currency hedging was not novel or unique to WisdomTree, there was a dearth of investment strategies offering such exposure to U.S. investors, and WisdomTree was a pioneer in launching such strategies in the exchange-traded fund (ETF) structure.

WisdomTree’s First Hedged Currency Index for an Emerging Market Country

Up to this point, WisdomTree’s hedged currency strategies have focused on developed market currencies, given their liquidity and relatively inexpensive cost of hedging2. But Korea is an interesting market for hedging currency for four primary reasons:

1) Exports are important to Korea, with almost 60% of its gross domestic product (GDP) coming from exports. A declining currency could potentially be particularly helpful for Korean profits.

2) Korea’s exports share a high degree of overlap with Japan’s. Korea is arguably the country that would be most impacted by Shinzo Abe’s programs to stimulate Japan’s economy, which have resulted in a weaker yen. If the yen continues to weaken considerably, Korea may have to counteract these measures, in which case a currency-hedged option could become more important for Korean equities.

3) Hedging currency risk has the potential to significantly reduce volatility.

4) South Korea is also a prominent exposure in the MSCI Emerging Markets Index—nearly 16%—second only to China, making it an important market in broad benchmarks.3