New Currency-Hedged ETFs Slow Out Of Gate

March 06, 2014

A slew of weak launches suggest that investors may be suffering from currency-hedged ETF fatigue.

Several new currency-hedged ETFs launched within the past two months are finding assets hard to come by. The funds are coming on the heels of a spectacular year of asset gathering for currency-hedged equity funds focused on a resurgent Japan.

But it appears investors may now be suffering from a case of currency-hedged overdose, or a lack of education about what those strategies can accomplish.

Fund sponsors can be excused for trying to replicate the Midas touch of the now-$12 billion WisdomTree Japan Hedged Equity ETF (DXJ | B-51). After all, it gathered almost $10 billion in fresh assets last year. But at the end of the day, the Japan story may be the main reason for DXJ’s success.

Moreover, while investors understand that DXJ will protect them from the systematic weakening of the yen relative to the dollar, they may be confused about just how any one of the six new currency-hedged strategies might fit into a portfolio.

What is crystal clear is that investors seem to be cool to the new offerings in the early going, mainly because of too many choices and not enough education about the funds, according to Dennis Hudachek, an ETF specialist at

“I think investors are just getting bombarded with currency-hedged ETFs, but there’s very little understanding of exactly what those are,” said Hudachek.

He explained that if an investor is invested in an unhedged U.K.-focused ETF and the dollar moves 10 percent upward against the British pound, then the ETF actually loses 10 percent—even if the underlying securities don’t move at all. It comes down to the following: When the investor sells after such a currency move, those pound-denominated ETF holdings would convert into fewer dollars.

The six funds, all of which launched this year, and their assets, are as follows:

  • iShares Currency Hedged MSCI Japan ETF (HEWJ), $2.4 million
  • iShares Currency Hedged MSCI Germany ETF (HEWG), $2.4 million
  • iShares Currency Hedged MSCI EAFE ETF (HEFA), $2.5 million
  • db X-trackers MSCI South Korea Hedged Equity (DBKO), $5.0 million
  • db X-trackers MSCI Mexico Hedged Equity ETF (DBMX), $4.6 million
  • db X-trackers MSCI All World ex-US Hedged Equity (DBAW), $5.0 million

“What’s happened in Japan the past year has been a good thing because a lot of U.S. investors never really thought about currency exposure, and with the yen getting pummeled, investors are finally catching on that currency exposure in these funds is a big deal,” Hudachek noted.

Indeed, what currency-hedged equities funds offer investors is the opportunity to only invest in a given country’s stock market or set of countries’ stock markets.

That simple idea can be something of a mind-bender to investors, many of whom barely grasp that when they invest in, say, Mexico, they’re also investing in the dollar-peso cross. These currency-hedged strategies actually offer up that simplifying proposition but, with the exception of Japan, the idea has not really caught on.


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