Is Hedging Worth It?
The issue here is whether the cost of buying that portfolio insurance—or currency hedge—is worth it in the form of additional returns. At face value, HHYX is coming to market with a net expense ratio of 0.43 percent—only 3 basis points higher than its unhedged counterpart HYXU. Time will tell whether investors are being paid for that additional feature.
- The worst-performing high-yield bond ETF year-to-date is HYXU, and that’s thanks primarily to its exposure to currencies, particularly the euro.
The unhedged international bond portfolio has slid more than 6 percent so far this year, as the dollar gains strength due to diverging central bank policies around the world.
That performance stands in stark contrast to other high-yield bond ETFs that are currently in the black for the year. Consider that the Market Vectors International High Yield Bond ETF (IHY | C-76) is up 1.2 percent in the same period because much of its currency exposure is dollars, according to ETF.com Analytics.
Chart courtesy of StockCharts.com
“HYXU is focused on developed international corporate bonds primarily in Europe—Italy, Germany, France, etc,” Todd Rosenbluth of S&P Capital IQ told ETF.com. “The bonds are local currency ones, so they are being hurt by strength in the U.S. dollar versus the euro.”
If this backdrop of dollar strength is to continue, bringing to market a hedged version of HYXU that allows investors to capture the attractive yields while protecting themselves from currency risk seems like a pretty good—and timely—idea.