With the dollar strengthening, now is the ideal time for investors to reconsider the advantages of hedging currency risk with international equities and exchange traded funds, such as the iShares Currency Hedged MSCI EAFE ETF (Cboe: HEFA).
The $3.61 billion HEFA, which turned four years old earlier this year, is a currency hedged strategy on the popular MSCI EAFE Index. In fact, HEFA’s primary holding is the iShares MSCI EAFE ETF (NYSEARCA: EFA) with a currency hedged overlay.
As the U.S. dollar pushes higher, investors who are looking into international market and related stock exchange traded funds should consider hedging foreign exchange currency risks. The dollar index, which tracks the USD’s movement against a group of six major currencies, has strengthened in recent weeks after other major central banks did not show any hints of following the Federal Reserve in normalizing their monetary policies.
HEFA “has a few advantages over its competitors. Its diversified portfolio captures a large chunk of the available foreign market capitalization while also hedging currency risk,” said Morningstar in a recent note.
HEFA Market Trending Details
HEFA follows the MSCI EAFE 100% Hedged to USD Index. The ETF is up nearly 3% year-to-date. Its selection universe is mid- and large-cap stocks from 21 developed markets outside the U.S. HEFA also excludes Canada and emerging markets.
“Over the long term, currency risk usually isn’t well compensated, which can make currency-hedging attractive for those who would prefer to avoid the extra volatility,” according to Morningstar. “This fund uses currency forwards to hedge its currency risk, which should reduce its volatility relative to the unhedged MSCI EAFE Index. However, it can cause the fund’s performance to deviate from its competitors’.”
Japan and the U.K. combine for over 41% of HEFA’s geographic exposure. France and Germany, the Eurozone’s two largest economies, combine for over 20%. As a developed markets fund, HEFA is not highly volatile as highlighted by a three-year standard deviation of just under 11%.
“From its launch in January 2014 through December 2016, the fund outperformed 98% of its competitors because the dollar appreciated against many foreign currencies, benefiting a hedged strategy like this one,” said Morningstar. “But the dollar subsequently depreciated in 2017, causing the fund’s total return to fall to the bottom of the category for that year. Over long periods, currency movements tend to have little impact on total returns.”
Morningstar has a Bronze rating on HEFA.
For more information on currency-hedged strategies, visit our currency hedged ETFs category.