Saying that currency hedged exchange traded funds are hot could be the ETF understatement of 2015. 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 likes of DBEF, HEDJ, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and the iShares Currency Hedged MSCI EAFE ETF (NYSEArca: HEFA) have rightfully received ample adulation, but there are other members of the currency hedged crew meriting of investors’ attention. [Momentum for Currency Hedged ETFs]
The hidden gem group includes the Deutsche X-trackers MSCI All World ex US Hedged Equity ETF (NYSEArca: DBAW), the currency hedged answer to the iShares MSCI ACWI ex U.S. ETF (NasdaqGM: ACWX). [Currency-Hedged ETFs Better Reflect the International Markets]
As its name implies, DBAW is home to stocks, 1,473 to be precise, hailing from a bevy of developed markets excluding the U.S. and some emerging markets. The unhedged MSCI ACWI ex USA Index features exposure to 33 countries, but the bulk of DBAW’s geographic weight is allocated to Japan and the U.K. Those countries combine for over 31% of the ETF’s weight.
Meanwhile, other Asian countries are seeing the stimulative measures as a beggar-thy-neighbor policy in disguise. Consequently, central banks in China, South Korea, Taiwan, Singapore and Thailand have already responded by easing their own monetary policies or will do so in the near future. DBAW has exposure to China and South Korea, among other Asian markets.
With the U.S. dollar crushing rival developed market currencies, the currency hedged ETF movement looks like it still has room to run. Divergences in monetary policy are compelling investors to take a more tactical approach to currency hedged ETFs, including DBAW.
With the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) up almost 20% this year, DBAW’s Japan exposure has helped drive the all-world ETF to a 9.2% gain. Meanwhile, DBAW’s unhedged counterpart is up 6.9%. [Expect Prolonged Dollar Strength]
The Japanese economy is growing more quickly than expected, bolstering the appeal of Japan country-specific exchange traded funds. Japan’s economy expanded an faster-than-expected annualized 2.4% compared to the previous quarter, reports CNBC. The economy grew 0.6% in the first quarter over the last three months of 2014.
Unlike other non-hedged international ETFs, DBAW’s underlying index is designed to diminish exposure to fluctuations between the value of the U.S. dollar and those of non-U.S. countries. However, potential investors should be aware that a currency-hedged ETF may underperform a non-hedged ETF if the local currencies begin appreciating, or the U.S. dollar weakens.
Deutsche X-trackers MSCI All World ex US Hedged Equity ETF