Currency hedged ETFs haven’t been getting much attention this year and that’s to the detriment of investors because a slew of foreign currencies have been weak against the U.S. dollar even though the Federal Reserve has lowered interest rates three times.
Investors can reengage currency hedged funds with the FlexShares Currency Hedged Morningstar DM ex-US Factor Tilt Index Fund (NYSEArca: TLDH).
TLDH tries to reflect the performance of the Morningstar Developed Markets ex-US Factor Tilt Hedged Index, which tries to enhance exposure to international stock markets by tilting toward long-term growth potential of smaller-cap and value segments while hedging foreign exchange fluctuations.
As the U.S. dollar pushes higher, investors who are looking into international market and related stock ETFs should consider hedging foreign exchange currency risks.
TLDH also includes a position in the non-hedged FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (NYSEArca: TLTD), along with currency forwards to hedge against currencies of Japan, U.K., France, Canada, Germany, Switzerland, Australia, Hong Kong, Italy, and Sweden.
Translation: TLTD is TLDH’s primary holding, a strategy used by some other currency hedged funds on the market.
Better Than Broader Benchmark
TLTD could provide better risk-adjusted returns than the broader large-cap benchmark. Specifically, its enhanced indexing process would allow the ETF to exclude expensive, low-quality companies with poor momentum.
On the surface, TLTD, which carries an annual expense ratio of 0.42% looks like a standard EAFE ETF due to its noticeable allocations to Japan and Australia, among other developed markets. However, TLTD does feature a legitimate “tilt” and it is toward “smaller-cap and value stocks using a multi-factor modeling approach that attempts to enhance portfolio risk/return characteristics,” according to FlexShares.
The currency-hedged international investment strategy is not a short-term play but a strategic long-term view for portfolio construction when incorporating international market exposure, which just so happens to be a good opportunity right now as many foreign markets look attractive relative to the pricey valuations here back at home.
Year-to-date, TLDH has rewarded investors with a gain of nearly 18%. Just over 48% of its weight is allocated to mid- and small-cap stocks, which is above-average in its respective category.
The FlexShares fund devotes 45% of its combined geographic weight to Japan and the U.K.
For more on ETF strategies, please visit our Multi-Asset Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.