Plenty of market participants and pundits have an opinion regarding when the Federal Reserve will raise interest rates. Fortunately, there is some uniformity to those prognostications with “later this year” being the most often bandied about time frame for Fed “lift-off.”
Conventional wisdom dictates that as markets anticipate higher interest rates from the Fed, the U.S. dollar rises. The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) has obliged, surging 5.4% year-to-date. Dollar strength combined with the anticipation of divergent monetary policies throughout the developed world has been a boon for currency hedged ETFs, three of which rank among this year’s top 10 asset gathering ETFs.
That trio includes the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF), which has tacked on $11.1 billion this year as investors have sought currency hedged exposure to the traditional EAFE funds.
DBEF, issued by Deutsche Asset & Wealth Management, is not a dedicated Europe ETF, but its exposure to European equities, both Eurozone and ex-Eurozone fare is, significant.
DBEF’s holdings can hail from 21 countries, including the following: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. With combined weight to France and Germany of over 19%, DBEF is a credible hedged euro idea. [Big Growth for This Currency Hedged ETF]
Pinpointing exactly when the Fed will raise rates has become a fool’s errand since 2013, but acquiring some knowledge to that effect is important.
“To understand the market’s expectations, we must look at the path that the Federal Funds Futures are currently implying for the policy rate. The market is trading at a level consistent with an average rate in December of 0.32%,” said Deutsche Asset & Wealth Management head of ETF Strategy Dodd Kittsley in a recent note. “If we assume a current rate of 0.13% (borne out by the July futures, and, as one would expect, the midpoint of our current range), that implies a predicted move of 0.19% between now and year-end– hardly overwhelming evidence that the market and the Fed are completely in agreement over expectations for the coming months.”
Currency hedged ETFs might not be, at least not, a bellwether in terms of gauging Fed action, but worth are recent inflows to the products. Since the start of the current quarter, DBEF has added $372.5 million in new assets while investors have poured nearly $233 million into the Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU).
Those inflows could be signaling professional investors’ belief that Fed liftoff is a done deal and is coming soon. Or perhaps that isn’t the case and easy money policies in the ex-U.S. developed world are driving the dollar higher and dollars into currency hedged ETFs.
Despite all the effort that the Fed has made over recent years to transparently communicate its thinking to the public, a divergence of opinion seems to be brewing. Yellen and other Fed officials have given reasonably strong suggestions that liftoff will occur this year, and indeed that investors may even need to brace for two rises. The markets beg to differ, and are pricing in a more dovish path,” adds Kittsley.
Chart Courtesy: Deutsche Asset & Wealth Management