IndexIQ Discusses Currency Hedging, HFXI ETF Reaction | ETF Trends

There have been significant swings made by investors dealing with volatility, but some products have continued to benefit. ETF Trends spoke with Dan Peterson, ETF Product Manager at IndexIQ, about the relative performance of its products during these tricky times.

First off, there’s the tremendous relative performance of its ESG ETF — the IQ Candriam ESG US Equity ETF (IQSU), which has just gotten off the ground but has shown to have less downside and more upside capture to the broader markets. On the alternatives side, the IndexIQ Hedge Multi-Strategy Tracker (QAI) has held up tremendously well. Essentially, its methodology has continued to act as it’s supposed to by providing broad data to the asset classes.

Moving on to the IndexIQ 50 Percent Hedged FTSE International ETF (HFXI), as a fund leaning on market cap-weighted international developed markets exposure, there’s been a lot of volatility in currencies since things took a shift. At the end of last year, there were trade war issues. Following that, the assassination in Iran. Now there are the pandemic issues.

Currencies have made wild swings back and forth since then, as defensive moves continue to be made. The U.S. dollar tends to strengthen as a result. However, as people move back into equities, which leads to the dollar weakening. So, to decide between currency or no currency, it becomes more and more difficult, given the constant movement.

“Even if you were to look at something like the WisdomTree dynamically hedged product, the well-founded theory behind how to pivot between currencies, it does not seem to be working. So, even a dynamically hedged product has underperformed both hedged and unhedged,” notes Peterson.

Really, a lot of what’s been spoken to on the currency hedging side of things is that emotionally it’s a very difficult thing to do because most people buy based on out-performance. Regardless of other aspects, this remains especially true in currencies because it tends to mean revert.

However, most people do make decisions based on past performance and are later making swings to the other side. So, while it is difficult on an emotional level, however, even if looking at things from a quantitative perspective like with the WisdomTree product, even that’s not working.

So, this just helps with the case for what the HFXI fund is accomplishing, which is coming up on its 5th anniversary. It can be a more efficient, neutral way to look forward in terms of how to decide between hedge and unhedged. And really, it’s just not worth making that decision in the end.

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