Ebbing volatility in currency markets is slowing inflows to currency hedged exchange traded funds, which have been this year’s most prolific asset gatherers.
“U.S. hedged ETFs attracted $204 million in the week through June 19, the least since December, data compiled by Bloomberg show. The funds have been among the most popular ones among investors, attracting $39.8 billion this year,” reports Rachel Evans for Bloomberg.
Those inflows are not too shabby when considering the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, is off nearly 1% over the past week. UUP is up 3.2% and the stronger dollar has been a major reason investors have flocked to currency hedged ETFs looking to exploit greenback strength against major developed market currencies such as the euro and yen. [Don’t Bet on Prolonged Dollar Weakness]
Led by the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF), four of this year’s top 10 asset-gathering ETFs are currency hedged funds. The other two are the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and the iShares Currency Hedged MSCI EAFE ETF (NYSEArca: HEFA). [Momentum for Currency Hedged ETFs]
HEDJ has pulled in almost $13.9 billion in assets this year, more than any other ETF, while DXJ has seen 2015 inflows of $4.2 billion. That is good for the sixth-best total among all ETFs. As of June 19, DXJ and HEDJ and $18.1 billion and $19.9 billion in assets under management, respectively.
DBEF, a currency hedged play on the popular MSCI EAFE Index, has also been a prolific asset gatherer. As of June 19, the ETF was home to $12.5 billion in assets under management, up from $800 million in mid-October.
Currency hedged ETFs have recently come under fire because some market observers have claimed differences in returns offered by these ETFs and their unhedged counterparts are “negligible” over the long-term.
That is true when making comparisons over decades and that lengthy time frame will include multiple strong and weak dollar environments. However, three years is also “long-term,” and over that period DBEF has outperformed the unhedged MSCI EAFE Index by 1,740 basis points. Over the same period, DXJ has offered by better than double the returns of the unhedged iShares MSCI Japan ETF (NYSEArca: EWJ).
Additionally, the recently slack inflows to currency hedged ETFs may not persist for long as further downside is expected for the euro and yen.
“The euro is forecast to fall another 7.4 percent by year-end, while the yen is predicted to decline 2.1 percent, the median estimates of analysts surveyed by Bloomberg News show,” notes Bloomberg.
Deutsche X-trackers MSCI EAFE Hedged Equity ETF