2015’s Hottest ETFs Share Currency Hedges

May 04, 2015

The WisdomTree Europe Hedged Equity ETF (HEDJ | B-54) and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF | B-72) are the most popular ETFs year-to-date, gathering a combined $22 billion in fresh net assets so far. That’s roughly $1 of every $3 finding its way into the ETF market this year.


Behind that enormous investor appetite for these two funds is concern that the dollar strength in the past few years risks wrecking returns for U.S. investors who own international equities funds. 


The problem has been thorniest for U.S. investors interested in value plays in the downtrodden eurozone. After all, the euro has slid 7 percent so far this year, and by nearly a fifth in the past year. Owning a fund like HEDJ that peels out this currency cross has saved U.S. investors a lot of pain.


But DBEF is a slightly different beast. While DBEF—like HEDJ—protects investors from dollar strength against the euro, DBEF has several other currency crosses that impact the fund’s total returns. The fund is built on the MSCI EAFE Index, which targets developed countries other than the U.S. or Canada.



HEDJ, again, is an all-eurozone fund, and comparing the returns of it and a similar fund that also canvasses eurozone stocks, but without the currency hedge, is relatively straightforward.


But DBEF is just 30 percent allocated to the eurozone. Japan represents 23 percent of DBEF and other European countries that don’t use the euro; for example, the U.K., Switzerland and Sweden have allocations of 20 percent, 9.15 percent and 3.2 percent, respectively.


The trajectory of their performances is nearly identical, but there’s a nearly 4-percentage-point gap between them, as the chart below shows:



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