Single Factor ETFs Can Be Multifactor

June 28, 2017

For the most part, we've had a pretty steady ramp-up in terms of the share creation. That would support the view that people are using it more strategically, with the goal being to try to limit some of the volatility that comes from having that foreign currency exposure.

If you don’t have the core competency to make the currency call, this is going to try to do it for you—to dynamically set it every month as the world changes. Right now it’s about 50% hedged. For most of last year, it was two-thirds to 75% hedged. So it adapts as the world is changing around us. Has the hedging formula been working? Has it been keeping up with whatever changes are happening in the currency trends?

Siracusano: The big trend this year has been a weakening of the dollar. The dollar is down this year, 5.5-6% against the broad basket of currencies. Right now, the strategy is roughly 50% hedged. Six months ago, at the end of the year, it was about two-thirds hedged. It’s reacting to the different movements of currencies relative to the dollar. The goal would be, as the dollar weakens and foreign currencies appreciate, to gradually take on more and more currency exposure.

You're always going to be somewhere between obviously zero and 100, but as a practical matter, you're probably going to be between 16 and 83. Those are really the practical limits that are in the system. It’s not designed to be perfectly aligned with currency movements, but as the dollar is weakening, you gradually have more and more foreign currency exposure. And when that reverses and you get a multiyear cycle of the dollar strengthening, you gradually start to hedge out more of that foreign currency exposure.

Heather Bell can be reached at [email protected].


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