Currency-hedged foreign equity ETFs have caught on with investors— the latest example being the WisdomTree Europe Hedged Equity Fund (HEDJ | B-51) crossing $10 billion in assets. The milestone makes it WisdomTree’s second blockbuster fund in this highly prospective realm of the fund world.
There are nearly 30 funds with currency hedges targeting foreign markets, and over the past few years, they’ve accumulated more than $32 billion in assets. This week’s announcement about HEDJ as well as a filing from another major ETF provider that has yet to launch their own ETFs in that area suggest that the trend isn’t going to fade away anytime soon.
HEDJ: A ‘Smart Beta’ Bonanza
WisdomTree said on Feb. 17 that HEDJ hit the $10 billion mark. The fund, which launched at the start of 2010 originally focused on the developed international space and included a currency hedge, but it shifted to cover developed eurozone markets in August of 2012.
At the same time, WisdomTree added an additional indexing element that companies qualifying for the fund generate at least half of their revenues outside of Europe. Like many other WisdomTree funds, it targets dividend-paying equities and weights them by dividends paid over the preceding 12 months.
With the currency hedge and the focus on exporter stocks, the fund is designed to do well in a weakening euro environment, which is what has been going on for some time.
According to a press release from WisdomTree, HEDJ saw inflows of $5 billion in 2014, with more than half of that coming in the last few months of the year. It then went on to see a massive surge of nearly $3 billion in inflows during the first month of 2015.
HEDJ is now the second-largest currency-hedged foreign equity ETF, just a few billion behind the $13.2 billion WisdomTree Japan Hedged Equity Fund (DJX | B-56). Like HEDJ, DXJ has benefitted from a weakening currency as the yen has faltered.
Other firms – mainly iShares and Deutsche Bank – have also entered the currency-hedged space, but to far less success. For example, the iShares Currency Hedged MSCI EMU ETF (HEZU | D-41) and Deutsche X-trackers MSCI EMU Hedged Equity ETF (DBEZ) both launched in the latter half of 2014 and have accumulated $246 million and less than $6 million in assets, respectively. HEZU and DBEZ are both cheaper than HEDJ with its 58-basis-point expense ratio, but as latecomers they have significant obstacles to becoming competitive with HEDJ.
PowerShares Makes Its Move
As the fourth-largest ETF provider, Invesco PowerShares has been markedly absent from the currency-hedged space. But a recent filing indicates the firm is looking to harness two powerful trends in one swoop.
The four funds outlined in the initial prospectus dated Feb. 13, 2015, will combine a low-volatility approach with a currency hedge. Each will track an index provided by S&P Dow Jones Indices, and like other similar funds, they will implement the via currency hedge via the purchase of currency forward contracts. Components will be selected and weighted based on their volatility.
The proposed funds include:
· PowerShares International Developed Markets Currency Hedged Low Volatility Portfolio
· PowerShares Emerging Markets Currency Hedged Low Volatility Portfolio
· PowerShares Japan Currency Hedged Low Volatility Portfolio
· PowerShares Europe Currency Hedged Low Volatility Portfolio
Despite being based on benchmarks from S&P Dow Jones Indices, the funds tweak the index provider’s country classification system. The developed market fund will cover 21 non-U.S. developed countries but exclude Korea, while the emerging markets fund will include Korea among the 21 countries from which it selects its components.
The funds will list on the NYSE Arca, but the filings did not include any expense ratios or tickers.