Call it currency hedging 2.0. When it has come to international exchange traded funds, investors have had two options: Being completely unhedged or being 100% hedged with popular ETFs such as the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF).
IndexIQ, the ETF issuer known for its lineup of unique alternative and hedge fund replication funds, changed that today with the introduction of three ETFs that are 50% currency hedged. Those new ETFs are the IQ 50 Percent Hedged FTSE International ETF (NYSEArca: HFXI), IQ 50 Percent Hedged FTSE Europe ETF (NYSEArca: HFXE) and IQ 50 Percent Hedged FTSE Japan ETF (NYS Arca: HFXJ). Each of those ETFs track FTSE Russell indexes.
“Unlike currency indexes available today which hedge 100% of the US dollar currency exposure of the underlying securities, this new suite of indexes from FTSE Russell hedges against 50% of the fluctuations between the US dollar and the home currency of the underlying index constituents,” according to FTSE Russell. http://www.ftse.com/products/home
The IQ 50 Percent Hedged FTSE International ETF tracks the FTSE Developed ex North America 50% Hedged to USD Index, which is made up primarily of large- and mid-cap companies in Europe, Australasia and the Far East. Top equity holdings in HFXI include Nestle (OTCBB: NSRGY), Novartis (NYSE: NVS) and Toyota (NYSE: TM).
HFXI devotes nearly 43% of its combined weight to Japan and the U.K. with France, Switzerland and Germany combining for over a quarter of the new ETF’s weight. Top sector allocations include 25.3% to financial services, 18.5% to consumer goods and 14.2% to industrials, according to issuer data.
The IQ 50 Percent Hedged FTSE Europe ETF is benchmarked to the FTSE Developed Europe 50% Hedged to USD Index, which is made up of equities from 17 developed European countries. HFXE also features Nestle and Novartis among its top five holdings along with Roche, HSBC (NYSE: HBC) and Sanofi (NYSE: SNY). [A Return to Euro Hedged ETFs]
The U.K. holds a dominant position in HFXE, commanding a 32.2% weight. That is more than double the fund’s allocation to French stocks (14.2%). Switzerland chimes in at 14.1%, followed by Germany at 13.4%.
The IQ 50 Percent Hedged FTSE Japan ETF tracks the performance of the FTSE Japan 50% Hedged to USD Index, which is made up of Japanese equities. HFXJ’s top five holdings include Toyota, Mitsubishi UFJ Financial and Honda Motor (NYSE: HMC).
While the 50% hedged approach may appear novel, historical data suggests it will work. Citing a whitepaper authored by Robert Whitelaw, IndexIQ’s Chief Investment Strategist and Professor of Entrepreneurial Finance and Chair of the Finance Department at New York University’s Stern School of Business, IndexIQ notes that “between 2005 and 2014, there were five calendar years when the value of a basket of foreign currencies decreased versus the U.S. dollar (a situation when a currency hedged approach would have provided better returns) and five calendar years when the value of that same basket of currencies increased versus the U.S. dollar (when an unhedged approach would have provided better returns).” [Momentum for Currency Hedged ETFs]
HFXI charges 0.35% per year while HFXE and HFXJ charge 0.45% a year.