Investors and advisors may utilize a traditional long global investment and a currency-hedged strategy for foreign stock exposure. On the other hand, one may use a 50/50 currency hedged ETF instead of holding two different ETFs.
“The 50% hedge construction is the ‘currency neutral’ investment position,” Adam Patti, IndexIQ chief executive officer, said in an email. “We view these solutions as the optimal way to invest in international markets and believe that it will eventually become the default position by Advisors. We view this as the core international exposure and if you happen to have a strong view on which way currencies are headed, then invest in either the unhedged or 100% hedged as a tilt around this core to express a view that the dollar will be weak or strong.”
Many advisors are already implementing some form of a 50% hedge against foreign exchange moves by investing in two different ETFs – one hedged and one unhedged. However, this leaves investors with more work when rebalancing a portfolio, which would incur additional transaction fees as well as short-term capital gains.
Alternatively, investors may consider a 50% hedged/50% unhedged option, including 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). [New IndexIQ ETFs Bring the Neutral to Currency Hedged ETFs]
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. 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. 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.
Investors may find that the 50% hedged position could be a better way to invest in overseas markets over the long-term. Since currency fluctuations are inherently unpredictable and typically follow a cycle, foreign currencies will never continuously appreciate or depreciate.
“The 50% hedged position has been proven in many academic white papers to be the optimal hedge ratio unless a specific investor has an uncanny ability to time the markets consistently,” Patti said.