Currency-Hedged ETFs Shine on Strong Dollar

September 28, 2022

Remember the currency-hedged exchange-traded fund craze in the mid-2010's with billions in assets pouring in amid a surge in the dollar? 

Currency hedging might deserve another look as the dollar continues to strengthen, reaching levels it hasn’t in 20 years. Hedging away currency fluctuations can boost the performance of a non-U.S. fund in the current environment.  

Consider the performance of the $3.94 billion Xtrackers MSCI EAFE Hedged Equity ETF (DBEF) and the $3.51 billion iShares Currency Hedged MSCI EAFE ETF (HEFA), the largest currency-hedged equity ETFs, versus the $41.59 billion iShares MSCI EAFE ETF (EFA). While EFA is down 26.2% year to date as of Sept. 23, DBEF and HEFA are down 12.19% and 11.8%, respectively. 

Both funds have seen year-to-date inflows, with DBEF pulling in more than $115 million and HEFA adding an impressive $665 million.  

Currency-hedged funds representing Europe and Japan are also recording outperformance relative to their unhedged counterparts.  

 

 

Japan 

The $1.97 billion WisdomTree Japan Hedged Equity Fund (DXJ) is actually in positive territory. The ETF was once one of the poster children of currency hedging, pulling in more than $9.7 billion in 2013. Now it’s notching positive returns year to date of 2.43%, while the iShares MSCI Japan ETF (EWJ) is down 24.54%. Interestingly, it’s seen outflows of more than $80 million despite its outperformance. 

That said, DXJ incorporates a dividend strategy and focuses on companies that export goods. Dividend strategies have been doing well relative to broad markets. But the $447.39 million iShares Currency Hedged MSCI Japan ETF (HEWJ), which is just plain vanilla cap-weighted exposure to Japan’s market, it’s down far less than EWJ, with a year-to-date return of -4.64%. 

 

 

Europe 

Similarly, the $1.19 billion WisdomTree Europe Hedged Equity Fund (HEDJ) is outperforming its unhedged counterpart, the $3.19 billion iShares Core MSCI Europe ETF (IEUR), with a return of -18.89% versus a nearly 30% decline. Again, HEDJ’s performance is probably boosted by its focus on dividend-paying companies.  

However, the $470.3 million Xtrackers MSCI Europe Hedged Equity ETF (DBEU) has even better performance despite tracking a market-cap-driven index. It’s down less than 15% year to date. Surprisingly, both HEDJ and DBEU saw outflows, with HEDJ hemorrhaging $577 million and DBEU losing $46 million.  

 

 

Emerging Markets 

The effect is also seen with emerging markets, though a bit more muted. The $156.49 million iShares Currency Hedged MSCI Emerging Markets ETF (HEEM) is down 19.67% versus a nearly 26% decline for the $22.36 million iShares MSCI Emerging Markets ETF (EEM)

The majority of equity markets are deeply in the red in 2022, but for U.S. investors, it seems hedging away currency risk for non-U.S. investments in the face of a strengthening dollar can provide a bit of a boost.  

Keep in mind, the currency craze in the mid-2010's abruptly ended with many of these once-darling funds closing and assets eventually drying up. 

 

Contact Heather Bell at [email protected] 

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