Time To Hedge EAFE Exposure

March 18, 2013

 

Total Return Performance of DBEF vs EFA

 

When compared against DBEF since its June 2011 inception, there’s no doubt that the pound, yen and euro have taken their toll on EFA—the fund gained only 4.5 percent, while DBEF climbed 14.91 percent in the same period.

Even if you don't have an opinion on currency movements, the prudent strategy is to maintain a 50/50 exposure to EFA and DBEF. That way, you can maintain neutral exposure to the underlying currencies' effects.

So why have most investors “slept on” DBEF? Quite simply, it’s because of liquidity.

DBEF only trades an average of 10,000 shares per day, and bid/ask spreads have been fairly sporadic, reaching as much as 0.69 percent, or nearly double the fund’s expense ratio of 0.35 percent.

That may not be an issue for large orders, of course. But investors buying smaller blocks would be best served by reaching out directly to the ETF issuer’s capital markets desk; in this case, Deutsche Bank.

The capital markets desk would be more than willing to help facilitate your trade in order to ensure you can get in and out of the fund at fair prices by using Deutsche Bank’s own network of liquidity providers.

What I’m saying is this: No matter how you approach it, it pays to keep on top of currency exposure in your portfolio, and ruling out currency hedge strategies based on liquidity could cost you.


At the time this article was written, the author had no positions in the securities mentioned. Contact Ugo Egbunike at [email protected].


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