Daily ETF Watch: EEM 2.0—Currency Hedged

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

Managing Editor
Reviewed by: Olly Ludwig
Edited by: Olly Ludwig

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.


Factor-Focused Explosion

Separately, iShares filed regulatory paperwork this week detailing two factor-focused funds, one filing targeting “quality” and the other filing targeting “momentum”—the latest sign of intensifying competition in the already-heated world of enhanced-beta indexing.

The proposed funds are the iShares MSCI International Developed Quality Factor ETF and the iShares MSCI International Developed Momentum Factor ETF, and are the latest examples of how the rules-based world of enhanced indexed funds is slowly but surely invading pockets of the investment universe where legendary active asset managers like Warren Buffett have plied their trades for decades.

Factor-focused ETFs have been steadily catching on since Russell Investments disastrously shuttered 25 smart-beta strategies in August 2012. Indeed many of those then-unsuccessful strategies have reappeared as different funds from different sponsors, and some even have the very same indexes. “Smart beta,” including factor-focused funds, is without doubt the liveliest piece of the ETF universe.

Neither of iShares’ preliminary prospectuses included ticker symbols or proposed annual expense ratios.

Fund Changes Name

ProShares, a company that calls itself the “alternative ETF company” and seems to be staking its future on this concept of turning alpha into beta, is changing the name of one of its enhanced-beta strategies that cherry-picks constituents of the S&P 500 Index that have long histories of increasing their dividends.

The ProShares S&P 500 Aristocrats ETF (NOBL | B-61) will be called the ProShares S&P 500 Dividend Aristocrats ETF beginning on Oct. 1. The addition of the word “Dividend” to the name zeroes in on what the fund’s purpose is.

ProShares discussed this fund in an ETF.com webinar earlier this month. During that webinar, the company also introduced an internationally focused version of the dividend-growers concept, the ProShares MSCI EAFE Dividend Growers ETF (EFAD).


Olly Ludwig is the former managing editor of etf.com. Previously, he was a financial advisor at Morgan Stanley Smith Barney and an editor at Bloomberg News. Before that, Ludwig was a journalist at the Reuters News Agency in New York.