Investors may be departing fixed income exchange traded funds in droves this month, but the opposite is true of currency hedged ETFs and investors are becoming increasingly tactical with their currency hedge selections.
After leading anonymous existences last year, the iShares Currency Hedged MSCI Germany ETF (NYSEArca: HEWG), Deutsche X-trackers MSCI Germany Hedged Equity Fund (NYSEArca: DBGR) and the WisdomTree Germany Hedged Equity Fund (NasdaqGM: DXGE) have swelled in size 2014 as Germany’s benchmark DAX has been the best-performing major developed market index in the world.
With investors flocking to currency hedged ETFs, HEWG topped $1 billion in assets under management last week, becoming the first non-Japan single-country currency hedged ETF to join the $1 billion club. HEWG, which overlays the iShares MSCI Germany ETF (NYSEArca: EWG), the largest Germany ETF, with a EUR/USD hedge, has hauled in $940 million in new assets since the start of this year, according to BlakcRock data. [Mad Dash to Germany Hedged ETFs]
DXGE has more than tripled in size this year while DBGR has more than doubled in size, marking the second consecutive year the Deutsche Asset & Wealth Management offering has done so. Solid inflows to hedged Germany ETFs have continued this month, led by almost $248 million in assets flowing into HEWG. DBGR and DXGE have added a combined $177 million since March 1.
Some institutional investors have been attracted to HEWG’s use of non-deliverable forwards (NDFs).
“NDFs can be efficient, flexible hedging instruments that directly source liquidity from traditional deliverable currency forwards, while typically maintaining tight pricing and comparable spreads to deliverable forwards,” according to iShares.
With its heavy tilt toward large, multi-national companies, the DAX index is benefiting from a depreciating euro currency. A weaker euro would help support export growth and potentially generate greater revenue from overseas operations for the multi-nationals.
The euro hedged Germany ETFs are case studies in the advantages of currency hedging in a strong dollar environment. Year-to-date, the unhedged EWG is up 9.2%, but the aforementioned trio of Germany hedged ETFs are up an average of 20.6% this year.
“For example, if you were invested in Europe last year, you may have expected a positive return based on the performance of European stocks. However, because the U.S. dollar strengthened against the euro, your return would have been negatively impacted when converted back into dollars. In fact, international developed markets, emerging markets, Europe, Germany, and Japan all had positive returns in their local currencies but registered losses in dollars last year,” according to iShares. [Investors Rush to Germany ETFs]
iShares Currency Hedged MSCI Germany ETF
ETF Trends editorial team contributed to this post.