Daily ETF Watch: Half-Hedged Funds Planned

May 04, 2015

IndexIQ’s first filing for new ETFs in the wake of its acquisition by New York Life Investment Management adds a new twist on a growing trend in foreign equity funds. The SEC paperwork outlines the firm’s plans for five ETFs that apply a partial currency hedge rather than attempting to fully hedge away the effects of currency on a portfolio’s performance.

 

The funds hit favorite currency hedging targets like Japan and Germany, and the full list is as follows:

 

  • IQ 50 Percent Hedged FTSE International ETF
  • IQ 50 Percent Hedged FTSE Europe ETF
  • IQ 50 Percent Hedged FTSE Germany ETF
  • IQ 50 Percent Hedged FTSE Japan ETF
  • IQ 50 Percent Hedged FTSE Emerging Markets ETF

 

So far, the field of currency-hedged ETFs is dominated by WisdomTree, which has upward of $40 million in combined assets under management in its two largest hedged funds, the WisdomTree Europe Hedged Equity ETF (HEDJ | B-54) and the WisdomTree Japan Hedged Equity ETF (DXJ | B-67). Deutsche Bank and iShares have also entered the field with their own offerings, with other names like PowerShares and ProShares looking to get into the space, judging by recent filings.

 

Most of these products try to hedge away any and all currency risk, but IndexIQ is apparently recognizing that, for some investors, the currency risk is part of the appeal of investing overseas. After all, like most risks, it can cut both ways and enhance the performance of a portfolio just as much as it can harm performance. The IndexIQ lineup will apply a 50 percent currency hedge that will aim to blunt the impact of currency on a portfolio’s performance by half.

 

According to the prospectus, the “Underlying Index applies a one month forward rate to approximately half of the value of the non-U.S. dollar denominated securities included in the Underlying Index” for this purpose.

 

With the international equities ETF field inundated with currency-hedged products, IndexIQ is offering an interesting point of differentiation that could appeal to investors who are interested in eliminating some but not all currency risk.

 

Of course, a similar—and more easily customized—effect could be achieved by holding a portfolio that is 50 percent a currency-hedged ETF and 50 percent its unhedged counterpart, such as pairing the iShares MSCI Germany ETF (EWG | A-97) with the iShares Currency Hedged MSCI Germany ETF (HEWG | D-53). After all, the iShares lineup of currency-hedged ETFs generally consists of ETFs that hold their unhedged counterparts and apply a hedge via forward currency contracts to that portfolio.

 

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