With the U.S. Dollar Index rising to its highest levels in over four years and scores of developed market currencies hitting multi-year lows, the time is right for advisors to examine the benefits currency hedged exchange traded funds in client portfolios.
While the Federal Reserve has wrapped up its quantitative easing program, other developed market central banks appear committed to keeping the easing torch burning. The Bank of Japan recently reaffirmed its commitment to a weaker yen and market participants are betting the European Central Bank will imminently announce its own Fed-style bond-buying effort.
On the upcoming webacast, The Importance of Currency Hedging in a Strong Dollar Environment, which will take place at 1PM Eastern time on Thursday Dec. 4, Luke Oliver, head of U.S. ETF Capital Markets at Deutsche Bank, Riverfront Investment Group Director of International Portfolio Management Chris Konstantinos and Riverfront Chief Investment Strategist Rod Smyth will discuss how advisors can employ currency hedged ETFs in preparation of sustained dollar strength.
Advisors and investors have previously turned to the unhedged MSCI EAFE Index and related ETFs for broad, ex-U.S. developed markets exposure. However, as Oliver told ETF Trends earlier this year, from 2000 through 2013, the MSCI EAFE Index gained 45%, but when stripping out the effect of the weak dollar, the index was essentially flat. [These are the Days for Currency Hedged ETFs]
Dollar strength, which predictably has led to weakness for an array of developed market currencies this year, has been a boon for the DeutscheX-trackers MSCI EAFE Hedged Equity Fund (NYSEArca: DBEF).
DBEF tracks the MSCI EAFE US Dollar Hedged Index, the hedged equivalent of the well-known MSCI EAFE Index. With 22.4% of its weight allocated to Japanese stocks and 26% devoted to Eurozone nations, DBEF stands out as a valid option for advisors looking to exploit the strong dollar as well as BOJ and ECB easing efforts.
The currency hedge difference has been on full display this year as DBEF has jumped 5% while the unhedged MSCI EAFE Index is lower by 4.7%. That scenario helps explain DBEF’s exponential growth. DBEF entered 2014 with about $313 million in assets under management. Today, the ETF has over $1.2 billion in assets under management. [Falling Currencies Lift This ETF]
DBEF has not just doubled in size this year, its AUM total has more than quadrupled as investors have rushed to exploit a strong dollar and tumbling developed market currencies while maintaining equity exposure.
Over the 10 years ending in the second quarter of 2014, the hedged equivalents of the MSCI EAFE Index were less volatile than their unhedged counterpart while sporting a higher Sharpe Ratio, according to Deutsche Asset & Wealth Management data.
Financial advisors who are interested in learning more about DBEF and the advantages of currency hedged ETFs can register for the Thursday Dec. 1 webcast here.