Currency-Hedged ETFs Soar as Yen Hits 33-Year Low

Currency-Hedged ETFs Soar as Yen Hits 33-Year Low

HEWJ has delivered double the gain of EWJ.

sumit
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Senior ETF Analyst
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Reviewed by: etf.com Staff
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Edited by: Kent Thune

The U.S. dollar has been falling lately as interest rates decline and traders ratchet up their bets on Fed rate cuts for early next year.  

But not every currency has risen against the greenback over the past month. The Japanese yen bucked the trend to hit a 33-year low versus the dollar earlier this week. 

The yen has been trending lower for close to two years as the Bank of Japan stubbornly holds onto its ultra-low interest rate policies despite the highest levels of inflation in decades.  

The BoJ’s policies have been the polar opposite of other central banks, which have swiftly hiked rates to combat sizzling consumer prices.  

Not even the prospect of lower rates in the U.S. has stemmed the bearishness surrounding the yen, though that could change if markets begin to price in more significant Fed rate cuts than they are today.  

The $228 million Invesco Currencyshares Japanese Yen Trust (FXY) has fallen by 12% in 2023, while bargain hunters have added $76 million to the ETF so far this year.

Yen Decline and Currency Hedged ETFs 

Funds tied to currencies aren’t the only ones impacted by the yen’s plunge to a 33-year low. Japanese equity ETFs, like the $13 billion iShares MSCI Japan ETF (EWJ), have been hurt by the drop in the currency as well. 

Sure, EWJ is up 13.8% so far this year, but that sharply lags the nearly 30% gain for the MSCI Japan Index priced in yen. In other words, for U.S. investors, the decline in the yen has chopped off nearly half of the gains for EWJ.  

ETFs that hedge currency exposure have fared better. iShares Currency Hedged MSCI Japan ETF (HEWJ) is higher by over 34%, while the WisdomTree Japan Hedged Equity ETF (DXJ), which also hedges currency exposure while tilting its portfolio towards companies that benefit from a weaker yen, is up by nearly 40%. 

Currency hedged ETFs tend to outperform when the dollar is rising, while they underperform when the dollar is falling.  

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.