We spoke about building interest in downside exposure to the U.S. Dollar recently via UUP (PowerShares USD Index Bullish, Expense Ratio 0.80%) puts, and yesterday was no exception as we saw more than 250,000 June 25 puts trade in this ETF.
Volume in the product has been above normal for at least two weeks now and there appears to be some trepidation in terms of the USD continuing its momentous climb in months to come.
Given that there has been evident concern in other global currencies falling versus the USD and thus there has been immense growth and interest in “Currency Hedged Equity” products, perhaps the recent put buying if directionally correct will mark a seachange in terms of global currency movements.
The key question is will institutional portfolio managers and others using the largest Currency Hedged ETFs in portfolios adjust their portfolio strategies if the U.S. Dollar indeed peters out versus global currencies at some point?
We see twenty seven individually listed “Currency Hedged Equity” products listed in the U.S. marketplace currently, and this may be the top area for ETF asset and product listing growth in recent recollection judging by the immense inflows in the past several years and increasing institutional and retail interest.
WisdomTree leads the way in the category in terms of assets with HEDJ (WT Europe Hedged Equity, Expense Ratio 0.58%) having gathered >$15.7 billion including a massive $8.6 billion of inflows just year to date. Interestingly, the fund debuted back in 2009 but really kicked it into high gear in the trailing eighteen months or so, even outgrowing DXJ (WT Japan Hedged Equity, Expense Ratio 0.48%) which is right behind with $15.5 billion in AUM (including >$2.4 billion in inflows YTD).
WisdomTree is not alone in this Currency Hedged Equity category in terms of fund sponsors, as iShares for example has made a mark with HEFA (iShares Currency Hedged MSCI EAFE, Expense Ratio 0.39%, $1.8 billion in AUM) and HEWG (iShares Currency Hedged MSCI Germany, Expense Ratio 0.53%, $1.1 billion in AUM), and to a lesser degree HEZU (iShares Currency Hedged MSCI EMU, Expense Ratio 0.51%, $629 million in AUM), and HEWJ (iShares Currency Hedged MSCI Japan, Expense Ratio 0.48%, $302 million in AUM).
Deutsche Bank cannot be ignored in this segment either with a number of entries here, the most popular in terms of AUM being DBEU (Deutsche MSCI Europe Hedged Equity, Expense Ratio 0.45%, $1.7 billion in AUM) and DBJP (Deutsche Japan Hedged Equity, Expense Ratio 0.45%, $870 million in AUM) and several other products granting exposure to Mexico, Brazil, the U.K. and others. Innovation has certainly not slowed in this ETF category as we have seen additional products roll out to market targeting even more esoteric “niches” in the Currency Hedged Equity space like DXJT (WT Japan Hedged Tech, Media, and Telecom, Expense Ratio 0.43%), and EUSC (WT Europe Hedged SmallCap Equity, Expense Ratio 0.58%) for example.
What we are wondering in the face of a U.S. Dollar downturn, whenever that may occur, is will a) the torrid pace of inflows into such funds slow if the U.S. Dollar stops appreciating against global currencies and b) will this ultimately stifle product innovation and asset growth in the space given the fact that some ETF investors may choose to “stop currency hedging their international equity exposure” simply because the runaway U.S. Dollar bull will have run its course?
WisdomTree Europe Hedged Equity Fund
For more information on Street One ETF market commentary and ETF trade execution/liquidity services, contact Paul Weisbruch at pweisbruch@streetonefinancial.com
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