Daily ETF Watch: EEM 2.0—Currency Hedged

September 25, 2014

iShares brings out a much-awaited currency-hedged version of its emerging market blockbuster ETF.

BlackRock’s iShares, the world’s biggest ETF company, today launched a currency-hedged version of its $42 billion blockbuster ETF, the iShares MSCI Emerging Markets (EEM | B-97)—a well-timed launch to the extent that rumblings of U.S. rate hikes are strengthening the dollar in global currency markets.

What that means for holders of the new iShares Currency Hedged MSCI Emerging Markets ETF (HEEM) is that their returns won’t be hurt by a strengthening dollar. Conversely, U.S. holders of EEM—or any other non-currency-hedged international fund—would see their returns dented as the greenback gained value against any other currency.

With Europe on the verge of deflation, Japan focused on weakening its yen, and much of the emerging markets dreaming about powerful new growth, it would appear that the U.S. is almost alone in laying the groundwork for an increase in borrowing costs. Again, this makes HEEM exceedingly well-timed and, in broader perspective, iShares is giving ETF investors real choices in the way they choose to invest.

Currency-hedged ETFs are of course hardly new, and not even for iShares.

HEEM Not First And Not Cheapest

Deutsche Bank led the charge a few years back with a rollout of a number of currency-hedged strategies, including a pioneering currency-hedged emerging markets fund that is based on the same index as iShares’ new fund HEEM.

The Deutsche fund, the Deutsche X-trackers MSCI Emerging Markets Hedged Equity ETF (DBEM | F-61), has an annual expense ratio of 65 basis points, or $65 for each $10,000 invested. The new iShares fund has an annual expense ratio of 70 basis points—potentially a slight disadvantage.

But then again, iShares is using shares of the massively liquid EEM as the underlying constituent of the new fund HEEM, which will make this new security highly tradable from the get-go.

Conversely, Deutsche Bank uses the underlying stock in the mother index—the MSCI Emerging Markets Index—as the constituents of its currency-hedged emerging markets fund, DBEM. To put a finer point on the distinct structures of the two funds, iShares’ EEM has $42 billion in assets, while Deutsche’s DBEM has $30 million.


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