“Investors have paid closer attention to currencies over the past few years because of the material impact currency exposure has had on international equity investments.,”Jack Fowler, V.P of Global Client Group for Deutsche Asset Management, said “Overall, hedged indices seek to give investors the same equity exposure of a local investor and strip out this additional currency risk.”
The Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF), which takes the currency hedged exposure of developed Europe, Australasia, Far East countries, has been a popular broad international play. DBEF was the second most sought after ETF of 2015. DeAWM also offers the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ) for hedged Eurozone exposure and the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) for a hedged Japanese equity position.
Moreover, the Fed tightening will also cause yields to rise or bond prices to fall. Advisors and investors have begun to hedge against rising rates by shifting down the yield curve to lower duration bond funds. On the other hand, Chuck Self, CIO and COO of iSectors LLC, suggests investors may turn to innovative low duration bond portfolios as a way to diversify risks. For instance, people can look to hedged bond investments.
With yields ticking higher, bond investors can utilize rate-hedged bond ETFs to generate income and help better maintain their principle, including the Deutsche X-trackers Investment Grade Bond – Interest Rate Hedged ETF (NYSEArca: IGIH), Deutsche X-trackers High Yield Corporate Bond – Interest Rate Hedged ETF(NYSEArca: HYIH) and Deutsche X-trackers Emerging Markets Bond – Interest Rate Hedged ETF (NYSEArca: EMIH).
IGIH tracks investment-grade corporate bonds, HYIH includes a group of speculative-grade junk bonds and EMIH follows U.S.-dollar-denominated emerging market bonds. These options try to mitigate interest rate sensitivity across the yield curve in a rising rate environment by taking short positions in U.S. Treasury futures. Through their short positions, the hedged bond ETFs have a modified duration of about zero years – duration is a measure of a bond fund’s sensitivity to changes in interest rates. Consequently, since these bond ETFs essentially have a zero duration, a rising interest rate would not negatively affect the investments.
Financial advisors who are interested in learning more about alternative ETF strategies for a rising rate environment can listen to the webcast here on demand.