Why ETF Investors Should Hedge Their Currency Exposure

IndexIQ’s Petersen talks currency-hedged ETFs.

Currency-hedged ETFs were all the rage eight years ago. Funds like the WisdomTree Japan Hedged Equity ETF (DXJ) and the WisdomTree Europe Hedged Equity Fund (HEDJ) accumulated billions of dollars of assets as investors sought ways to insulate themselves from a surging dollar. But that enthusiasm has died down since then.  

In this episode of Talk ETFs, etf.com senior analyst Sumit Roy sits down with IndexIQ’s equities product manager, Dan Petersen, to talk about why investors should hedge their currency exposure, IndexIQ's unique approach to currency ETFs, as well as about other topics related to currency hedging. 

The biggest currency-hedged ETFs hold a fraction of the assets they once did: HEDJ was a $22 billion ETF in 2015; today, it has only $1.4 billion in AUM. And investors don’t seem to care about hedging their currency exposure. 

Perhaps they should. Index IQ’s Petersen says that there are benefits to hedging foreign currency exposure when investing in international ETFs.  
 
“Volatility with currencies can get tricky and over the short, medium and long-term, it’s very difficult to have a view on where currencies are going,” explained Petersen.  
 
IndexIQ is the issuer of the $433 million IQ FTSE International Equity Currency Neutral ETF (HFXI), which takes a unique approach to currency hedging by hedging 50% of its foreign currency exposure. 

“If you’re able to provide 50% currency exposure, you kind of get the best of both worlds. You don’t have as much volatility from currencies, but you do have the benefits if foreign currencies start to strengthen again,” Petersen said.