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.


The Japan Story

But investors have caught on to Japan, though it might be more about returns than with isolating investment variables.

DXJ’s considerably smaller competitor, the $447.7 million db-X MSCI Japan Currency Hedged Fund (DBJP | C-55), didn’t fare too badly either, gathering $316.5 million in new assets last year.

Year-to-date, DXJ has added $258.1 million to its coffers, and DBJP has taken in $129.8 million.

Both funds focus on Japan’s growth story, fueled by Prime Minister Shinzo Abe’s policies—dubbed “Abenomics.” Investing in Japanese stocks paid off in a big way in 2013 as the Nikkei 225 Index surged 57 percent on the back of a plunging yen.

DBJP gained 46.6 percent and DXJ was up 37.3 percent in 2013.

By comparison, the non-hedged iShares MSCI Japan ETF (EWJ | B-97) returned 24.7 percent last year—respectable, but still quite a bit less than DBJP or DXJ, which both benefited from the currency-related tailwind.


Chart courtesy of

No DXJ And DBJP Redux

However, the newly launched HEWJ, a currency-hedged version of iShares’ $13.9 billion iShares MSCI Japan ETF (EWJ | B-97), is only managing some $2.4 million since it launched on Jan. 31. The fund is up 4.6 percent year-to-date.

Other new hedged ETFs from iShares, including the Germany-focused HEWG and the EAFE-index-focused HEFA, have also been slow out of the gates gathering assets. HEWG and HEFA, as noted, are currently managing $2.4 million and $2.5 million, respectively.

“What’s crazy now is that there are more Germany-hedged ETFs than nonhedged ETFs,” noted Hudachek. “In the past, the iShares MSCI Germany ETF (EWG | A-97) was the main play for Germany, but now you have three, so how do you pick between them?”

HEWG joins the incumbents db-X MSCI Germany Currency Hedged Equity Fund (DBGR | B-50) and WisdomTree Germany Hedged Equity ETF (DXGE) in a growing field of German-focused currency-hedged ETFs.

DB Asset Inflows? Nein!

But iShares wasn’t the lone issuer coming to market last month. Deutsche Bank also launched three hedged ETFs: DBKO, DBMX and DBAW.

The three funds launched on Jan. 23 and to date, the South Korea-focused DBKO and MSCI All World-focused DBAW each have $4.9 million in assets, and DBMX, targeting Mexican stocks with a currency hedge, is currently managing $4.6 million.

DBKO joins the WisdomTree Korea Hedged Equity ETF (DXKW) as another early hedged ETF focusing on South Korea.

DBMX is the first ETF to challenge iShares’ blockbuster $2.4 billion iShares MSCI Mexico Investable Market fund (EWW | B-94) in the Mexico Total Market segment, which has been a single-fund segment since 1996, according to an analyst report.


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