The world of currency hedged exchange traded funds is growing. At least six such ETFs from two different issuers have debuted just this year.
But even with that growth, yen hedged ETFs, namely the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and the db X-trackers MSCI Japan Hedged Equity Fund (NYSEArca: DBJP), dominate the currency hedged ETF conversation.
That does not mean investors should simply gloss over other currency hedged ETFs. Not when currency fluctuations can erode a portfolio’s returns and not when some foreign currencies, including the euro, are viewed as overvalued.
“USD strength is anticipated in 2013 as expectations for ending QE are moved up while the U.S. outperforms most of the G10 world,” Daniel Brehon, V.P. of FX Strategy for Deutsche Bank, said in a recent ETF Trends webcast. [Currency ETFs for a Stronger U.S. Dollar]
What follows is a list of some of the unheralded but still useful currency hedged ETFs on the market today along with their 2014 performances. Let’s get started with the…
WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ)
2014 Performance: Up 2.2%
Comment: Admittedly, calling the WisdomTree Europe Hedged Equity Fund “unheralded” is not entirely accurate. After all, HEDJ is home to $912.4 million in assets as of Feb. 21. Once upon a time, HEDJ was somewhat obscure when it was a multi-region, multi-currency fund. In the second half of 2012, WisdomTree smartly reconfigured the ETF to focus on exporters based in Eurozone countries.
Germany, France and the Netherlands combine for about two-thirds of HEDJ’s country weight. The ETF tracks the WisdomTree Europe Hedged Equity Index (WTEHIP), which mandates constituent companies derive at least 50% of their revenue in the latest fiscal year from countries outside of Europe.
db X-trackers MSCI EAFE Hedged Equity Fund (NYSEArca: DBEF)
2014 Performance: 1.5%
Comment: The db X-trackers MSCI EAFE Hedged Equity Fund is the currency hedged answer to the iShares MSCI EAFE ETF (NYSEArca: EFA), which is now the second-largest U.S.-listed ETF. Few ETFs are likely to catch EFA in terms of heft, but DBEF is by no means small with $354.3 million in assets. Plus, DBEF has slightly outperformed EFA this year. DBEF’s asset growth has been remarkable as the fund had just $4.5 million in assets in late 2011. [ETF Spotlight: Currency-Hedged Equity Fund]
DBEF’s newest rival is the iShares Currency Hedged MSCI EAFE ETF (NYSEArca: HEFA).
db X-trackers MSCI Germany Hedged Equity Fund (NYSEArca: DBGR)
2014: Up 2.7%
Comment: DBGR is part a member of a crowded field of Germany ETFs and a growing number of those funds are currency hedged plays. Including DBGR, the hedged currency avenue to the Eurozone’s largest economy is potentially attractive on multiple levels.
First, the euro is viewed by many market participants. Second, a hedged Germany ETF does not mean investors are sacrificing exposure to high-quality exporters that make the German investment thesis attractive in the first place. Increasing the allure of DBGR is Germany’s trade surplus, which reached a record $270 billion last year. DBGR has doubled in size this year. [ETF Investors Embrace a Different Way to Germany]
iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ)
2014: Up 5.6%
Comment: Talk about good timing, HEWJ debuted earlier this month just as traders were starting to sink their teeth back into short yen trade. HEWJ is home to 317 stocks, including familiar names such as Toyota (NYSE: TM), Honda (NYSE: HMC) and Hitachi. The newest addition to the yen hedged ETF group charges 0.48% per year.
WisdomTree Japan Hedged Small Cap Fund (NasdaqGS: DXJS)
2014: Down 2.1%
Comment: DXJS debuted in late June 2013 as the small-cap answer to DXJ, but there is another important difference between the two funds. That being DXJS offers a larger tilt toward a domestic recovery in Japan’s economy, the world’s third-largest.
DXJS features a combined 34.5% weight to discretionary and staples stocks. Investors are starting to acknowledge the potential of DXJ as more than a third of the ETF’s $69.2 million in assets have come into the fund this year. [Despite Slow Starts, Japan ETFs Still Raking in Cash]
db X-trackers MSCI United Kingdom Hedged Equity Fund (NYSEArca: DBUK)
2014: Up 1.8%
Comment: The FTSE 100 Index closed at 6,865.86 Monday, its highest level since December 1999 and the resurgence of U.K. has , of course benefited the relevant ETFs. The issue facing DBUK and the WisdomTree United Kingdom Hedged Equity Fund (NasdaqGS: DXPS) is that the pound has risen in unison with British equities. [ETFs for U.K. Exposure as British Stocks Hit 14-Year High]
That has made unhedged U.K. ETFs the better performers this year, but with sterling up almost 7% in the past six months, some profit-taking could be in order. If that scenario materializes, DBUK and DXPS become more attractive.
Tom Lydon’s clients own shares of EFA and HEDJ.