With the U.S. dollar strengthening against a basket of foreign currencies ahead of an expected Federal Reserve monetary tightening cycle, Northern Trust’s FlexShares exchange traded fund division has launched currency-hedged versions of its popular multi-factor developed and emerging market ETFs.
Flexshares has launched the FlexShares Currency Hedged Morningstar EM Factor Tilt Index Fund (NYSEArca: TLEH) and the FlexShares Currency Hedged Morningstar DM ex-US Factor Tilt Index Fund (NYSEArca: TLDH), according to a press release.
“International equity exposure is a core element of many portfolios seeking long-term growth as developed markets allow investors to expand their opportunity set beyond U.S. borders. Our research shows that employing a tilted approach to capturing size and value factors potentially adds value to global equity strategies,” Shundrawn A. Thomas, head of Northern Trust’s Funds and Managed Accounts Group, said in the press release. “Currency fluctuations, however, add complexity when implementing an international strategy, especially during times of monetary intervention. By hedging the currency exposure in a tilted strategy, the resulting portfolio may provide optimal exposure while reducing potential volatility from currency fluctuations.”
Specifically, the Factor Tilt may focus on investment characteristics based on factors like market capitalization and industry weighting, fundamental characteristics such as return variability and yield, and liquidity measures.
Additionally, both currency-hedged ETFs will include one-month currency forwards contracts to diminish the potential volatility in currencies with respect to the U.S. dollar – if foreign currencies depreciate against the greenback, international equities may generate a lower USD-denominated return. However, potential investors should be aware that if the foreign currencies appreciate against the USD, these currency-hedged ETFs may underperform non-hedged funds.
TLEH tries to reflect the performance of the Morningstar Emerging Markets Factor Tilt Hedged Index, which tries to enhance exposure to developing markets by tilting toward long-term growth potential of small-cap and value segments while hedging against currency risks.
The currency-hedged emerging market ETF includes a heavier tilt toward smaller companies than other market capitalization-weighted emerging market funds. TLEH’s market-cap weights include 6.2% micro-cap, 30.5% small-cap, 22.4% mid-cap and 40.9% large-caps. Additionally, the Factor Tilt may also contribute to the greater 44.1% weight in the value style, along with 31.7% blend and 24.2% growth.