Currency hedged ETFs outperform, pick up inflows as dollar gains

Tue Nov 11, 2014 1:10am EST
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By Ashley Lau

NEW YORK (Reuters) - U.S. investors who believe the dollar's 2014 surge will continue are pouring money into exchange-traded funds that invest in foreign markets but hedge the currency part of the bet.

BlackRock Inc (BLK.N: Quote), WisdomTree Investments Inc (WETF.O: Quote) and Deutsche Bank AG (DBKGn.DE: Quote) are among the companies starting new currency-hedged funds this year to take advantage of a flow of some $3.9 billion into currency-hedged ETFs so far this year.

There are now 35 U.S. listed currency-hedging ETFs managing $19.3 billion in assets, compared with only about $6.7 billion in assets in 2011, meaning total assets in currency hedged ETFs have nearly tripled over the past three years, according data from Lipper and

A currency hedged ETF strips out the foreign currency return of a given fund by investing in foreign currency forward contracts, and rolling those contracts, typically on a monthly basis.

The largest asset gatherer has been the WisdomTree Hedged Europe ETF (HEDJ.P: Quote), which since January has added about $2.6 billion, growing four-fold to $3.5 billion.

So far, the dollar's rise has made that strategy pay off handsomely. For example, investors who bet on Japanese stocks via the unhedged iShares MSCI Japan ETF EWJ.P have lost 0.7 percent over the past three months, as the yen sank against the dollar. Its hedged counterpart, the iShares Currency Hedged MSCI Japan ETF HEWJ.P, is up about 12 percent.

"Sometimes currency is not that relevant in the scheme of things, but times like now, when currencies are moving very can make all the difference," said Art Laffer Jr., a Nashville investment manager who now has about 25 percent of the global equity strategy he runs in currency hedged ETFs.

He bought the iShares Currency Hedged MSCI Germany ETF HEWG.P earlier this year and also owns the WisdomTree Japan Hedged Equity Fund (DXJ.P: Quote). He would hedge more of his foreign stocks portfolio if he could find more individual country funds offering that add on, he said.   Continued...

The BlackRock logo is seen outside of its offices in New York January 18, 2012. 
REUTERS/Shannon Stapleton