However, the Forex market is notoriously fickle, and the U.S. dollar has actually been weakening since the start of the year. Consequently, investors who have a more neutral stance on the foreign exchange outlook may consider a 50% hedged international investment, like HFXI and HFXE, as a way to limit volatility in their international exposure due to a sudden currency swing.
“Our research has shown that a 50% currency hedged approach can not only reduce the potential risk of misreading extreme currency movements (in either direction), but can also have a dampening effect on volatility,” Adam Patti, IndexIQ chief executive officer, said in a note.
Specifically, unlike more popular currency indexes available that hedge 100% of the US dollar currency exposure of the underlying securities, HFXI and HFXE’s underlying indices from FTSE Russell hedges against 50% of the fluctuations between the US dollar and the home currency of the underlying index constituents.
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 1.7%, Samsung Electronics 1.4% and Roche Holding 1.3%.
HFXI devotes a large 23.6% to Japan and 16.6% to the U.K., along with 41.3% to other Developed European countries. Top sector weights include financial 20.8%, industrials 13.2% and consumer cyclical 12.0%.
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 2.9%, Roche Holdings 2.1% and Novartis 2.1%.
The U.K. holds a dominant position in HFXE, commanding a 28.3% weight. Top sector weights include financial 20.5%, consumer defensive 13.9% and healthcare 13.0%.