ETF issuers with currency-hedged ETFs ride high on strong dollar

DEC 23, 20157:23 AM

[NEW YORK] As the US dollar strengthened throughout 2015, managers of currency-hedging exchange-traded funds had a banner year - they collected one of every four dollars invested in US ETFs and rewarded their investors well.

Now, they are doubling down with plans for as many as 41 new currency-hedging funds on file with regulators. But many of those funds may come to market after the easy money in currency hedging has been made.

That could be reflected in some of the new fund proposals from BlackRock Inc's iShares unit and WisdomTree Investments Inc. Both plan to launch funds that continually adjust their currency exposure based on the perceived value of the particular currencies at any time, a trade more nuanced than simply shorting currencies like the yen and euro while buying stocks in Japan or euro zone countries.

In 2015, while the European Central Bank and Bank of Japan eased monetary policy, the U.S. Federal Reserve raised interest rates for the first time in nearly a decade. Foreign currencies have sagged against the dollar, while the stocks of foreign exporters have been boosted because their products and services got cheaper in dollar terms.

Investors flung US$47 billion at US-listed currency-hedged ETFs in the first 11 months of the year.

There are now US$68.3 billion in these assets, compared with only about US$418 million in 2011, when the products were fledgling, according to FactSet.

But even some ardent proponents of these investments, such as RiverFront Investment Group LLC, a firm which helped hedged-ETF leader WisdomTree design its first currency-hedged products, are starting to take money off the table.

"You may have seen the end of the easy trade of being short the euro," said Michael Jones, chief investment officer of RiverFront, which pared back its exposure to such hedges for European stocks last month. Shortly thereafter, on Dec 3, an announcement of additional stimulus by the ECB was found wanting by the markets, pushing the euro up unexpectedly.

Investors who used currency-hedged funds for the most part did well in 2015. WisdomTree's Europe Hedged Equity Fund , delivered a 4.8 per cent gain this year, as the MSCI Europe index slid 4.7 per cent, according to Morningstar Inc data through Monday.

And investors in broad emerging-market funds would have lost only 9.7 per cent year-to-date rather than 16 per cent by using the iShares Currency Hedged MSCI Emerging Markets ETF instead of the far more widely traded iShares MSCI Emerging Markets ETF, the data showed.

But other hedged trades failed to pan out, even as the dollar appreciated 9 per cent against a basket of the euro, yen and four other currencies.

Despite hopes that a sinking yen would lift currency-hedged Japanese ETFs, the Deutsche X-trackers MSCI Japan Hedged Equity ETF's 8.6 per cent gain through Monday is roughly even with the 8.5 per cent gain of the iShares MSCI Japan ETF, according to Morningstar data.

The new funds proposed by WisdomTree and iShares would adjust their exposure to currencies based on market conditions in order to favour recently rallying currencies, those with higher purchasing power and those in countries with higher interest rates, among other factors, according to the filings.

Both WisdomTree and BlackRock decline to comment about funds that have not launched, but some of the filings said the goal of the funds is to limit investors' losses when foreign currencies depreciate while also allowing investors to profit when currencies appreciate.

REUTERS