The Importance Of Currency-Hedged ETFs

September 12, 2014

With investing becoming increasingly international, the reasons to hedge currency exposure are becoming better and better.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Scott Kubie, chief investment strategist of Omaha, Neb.-based CLS Investments.

Currency-hedged ETFs are in full bloom, growing from a few idiosyncratic ETFs to a major subset of the international ETF marketplace.

In the U.S., there are currently 26 currency-hedged international ETFs available. Half of those were launched this year and only six have been around long enough to have a three-year track record. In light of the expanding lineup of currency-hedged ETFs, investors should consider how using currency-hedging might adjust their strategic and tactical allocations.

The largest currency-hedged ETF is the WisdomTree Japan Hedged Equity Fund (DXJ | B-64) and the second is the WisdomTree Europe Hedged Equity Fund (HEDJ | B-50). These two ETFs are the oldest in the space and they both overweight export-oriented firms. Deutsche Bank tripled the size of the market when it launched four hedged ETFs. They are:

Both WisdomTree and Deutsche have continued to expand their offerings, and iShares joined the fray early this year, a clear sign that fund sponsors are ready to meet investor demand.

Growing International Focus

The importance of currency hedging is linked to a changing investment landscape. Strategically, the investment community has been migrating toward a single equity asset class, global equities, rather than breaking up portfolios into domestic and international buckets. While most still break those categories into two groups, there is greater recognition that the line between domestic and international isn’t always clear.

The globalization of business, markets and research is contributing to an increased allocation to international stocks in the portfolio.


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