As the foreign exchange markets experience wild swings, investors have thrown billions into currency-hedged exchange traded fund strategies that track international markets and help shield against currency risks.
For instance, the two most popular ETFs of the year are those that track international markets and hedge against depreciating foreign currencies, including the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ), which has attracted $15.6 billion in net inflows, and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF), which has experienced $12.9 billion in inflows, year-to-date, according to ETF.com. [Why Consider Currency Hedged ETFs]
According to ETFGI, global currency-hedged ETFs have seen assets surge 83% to $118.3 billion in the year ended July, with WisdomTree attracting the lion’s share of assets at $41.6 billion, compared to $26.0 billion for iShares and $22.5 billion for Deutsche’s db x-trackers, reports David Ricketts for the Financial Times.
Currency-hedged ETF growth is predominately coming out of the U.S. where assets have jumped 174% in the year ended July from $26.9 billion at the end of last year.
The recent overseas currency swings have fueled interest in currency-hedged options as a way to capture international market moves without the fear of weaker currencies weighing on U.S. dollar-denominated returns. [An International ETF That Helps Neutralize Currency Risks]
“Recent talk of currency wars based on the devaluation of key currencies has reminded investors of the need to manage currency risk,” Nizam Hamid, head of sales at WisdomTree Europe, told the Financial Times. “Having that built into a transparent and liquid ETF is a useful innovation.”
For instance, Deutsche Asset & Wealth Management calculated that in the 12 month period ended March 2015, U.S. dollar-based investors of the euro would have experienced a 22% decline as the EUR depreciated against the USD.
“Volatility has increased dramatically and the trend we are seeing is that clients want to implement a hedged portfolio by using an ETF,” Simon Klein, head of exchange traded product distribution and institutional mandates, Emea and Asia at Deutsche Wealth & Asset Management, told the Financial Times.
Nevertheless, potential investors should also fully understand the strategies and how they work before investing in the products.
“Some do so on the basis of monthly forward contracts, so the hedge does not protect for daily volatility,” Jose Garcia Zarate, an ETF analyst at Morningstar, told the FT.
Additionally, since the currency-hedged strategies implement some form of short currency option, the currency-hedged ETFs may underperform non-hedged ETFs if the underlying currencies strengthen or appreciate against the U.S. dollar.
For more information on the currency hedged strategy, visit our currency hedged ETF category.
Max Chen contributed to this article.