Currency-Hedged ETFs: Too Many, Too Fast?

May 28, 2013

Are all the currency-hedged ETFs now in the regulatory pipeline headed for success or oblivion?

It sure looks like this Friday’s upcoming rollout of the db X-trackers MSCI Germany Hedged Equity Fund (NYSEArca: DBGR) was carefully timed by Deutsche Bank to beat out WisdomTree in launching a similar strategy.

And so it goes in the marketing trenches of the ETF world.

The astonishing success of the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) seems to have given ETF sponsors hopes that DXJ’s success might be replicated in other parts of the investment universe, and they’re keen on conquering new frontiers before competitors.

It’s a tempting prospect.

After all, DXJ pulled in almost $8 billion this year and now has more than $10 billion in total assets. A competing fund from Deutsche, the db X-trackers MSCI Japan Hedged Equity Fund (NYSEArca: DBJP), has also grown into a viable $100 million fund this year after ending 2012 with just $5 million.

DXJ’s and DBJP’s success in the past several months is based on the Bank of Japan’s commitment to weaken the yen through quantitative easing in the hopes of making Japanese exports cheaper. The yen has weakened by 15 percent this year and by more than 20 percent in the past year, and owners of DXJ and DBJP have avoided that entirely.

But can that success be replicated, even as central banks around the world from Seoul to Canberra to Oslo cut interest rates to help stimulate their economies and make exports more competitive?

The record in terms of generating investor interest and gathering assets is mixed so far.

Two funds focused on Europe, the db X-trackers MSCI EAFE Hedged Equity Fund (NYSEArca: DBEF) and the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ), have $77 million and $313 million, respectively, with much of that asset gathering taking place this year.

But a few other currency-hedged funds from Deutsche haven’t been nearly as successful in terms of attracting assets, which begs the questions, Is this product overkill on the part of fund sponsors, or are investors not yet fully aware they can pull out a currency cross; or do they not care?

To the “overkill” or “they don’t care” possibilities, Deutsche Bank’s new Germany-focused fund that comes to market May 31 will be created from the carcass of the db X-trackers MSCI Canada Hedged Equity Fund (NYSEArca: DBCN) that neutralizes the loonie-dollar cross.

That fund was going nowhere fast, with just $4.6 million in assets.

The other two languishing currency-hedged ETFs from Deutsche have less than $10 million in assets. They are:

  • db X-trackers MSCI Emerging Markets Hedged Equity fund (NYSEArca: DBEM), $8.8 million
  • db X-trackers MSCI Brazil Hedged Equity fund (NYSEArca: DBBR), $7.9 million

So, one wonders, will Deutsche’s new Germany-focused strategy, DBGR, get any traction?

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