Needed: Currency-Hedged Asia-Pacific ETFs

September 17, 2013

ETF investors needed a currency-hedged Asia-Pacific ETF yesterday.

Currency-hedged ETFs have been a popular topic in 2013, thanks to the incredible success of the WisdomTree Japan Hedged Equity Fund (DXJ | A-45). But when I look at our most recent Currency Impact Report, I can’t help but wonder what could have been.

That’s because, from the Japanese yen to the Indian rupee to the Indonesian rupiah, Asian currencies have been a millstone pulling returns down for U.S. investors by between a quarter and a third in the past three months, as investors adjust to the prospect of tighter credit in the United States.

Over the past year, the Asian continent has been home to some of the worst-performing currencies around the globe.

Sure, the yen has gotten the lion’s share of attention thanks to Shinzo Abe’s bold policy proclamations about reflating Japan’s currency, but every single market with an MSCI benchmark—outside of South Korea—has suffered when converted to U.S. dollars.

In fact, over the past three months, the rupee, ringgit and rupiah have fared much worse than the yen. In aggregate, the weakness of Asian currencies cost investors nearly half of the 29 percent return local investors realized in the Asia-Pacific region.

Unfortunately, the product that would have allowed investors to avoid the effects of this wholesale currency weakness—the db X-trackers MSCI Asia Pacific ex Japan Hedged Equity Fund—is still stuck in the registration process.

The proposed fund is designed to take a number of currency crosses with the dollar off the table for U.S. investors in developed and emerging market countries, including Australia, China, Hong Kong, India, Indonesia, Malaysia, New Zealand, Singapore, South Korea, the Philippines, Taiwan and Thailand.

Its launch is probably imminent based on the fact that the product went into registration at the end of June. But that will come as little consolation to those investors who have held the iShares MSCI All Country Asia ex Japan fund (AAXJ | B-84) over the past year, whose returns have been badly dented by sundry currency crosses.

Still, the usefulness of currency-hedged strategies is no different than a year ago. After all, we live in a world of unprecedented central bank involvement in the global economy, and the impact that currency has on returns is striking.

For a number of reasons, the Asian continent has been a hotbed of currency volatility, and that trend shows no signs of abating. Investors seeking exposure to foreign equity markets are increasingly waking up to the reality that the performance of stocks in these portfolios is just one part of the equation.

Excluding Japan, currency has accounted for an equal or larger portion of total returns than the performance of the stocks themselves in five of the 12 markets we track.


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