Inside the New Currency Hedged ETFs from iShares

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As the taper begins to ravage international markets, investors in the ETF world are starting to see the impact of currencies on foreign holdings. Many currencies are slumping against the U.S. dollar, and this is really having a huge negative impact on stock prices when investors adjust returns back to American currency.

Thanks to this currency slide and the possibility of a strong dollar, investors are starting to embrace currency-hedged ETFs in droves. Several have proven their worth over the past few months and they have really begun to build up assets as a result, leading other ETF issuers to consider jumping in on the market as well (see all the Top Ranked ETFs here).

This trend has recently hit iShares, the world’s biggest provider of ETFs, prompting the firm to put out its first three currency hedged ETFs on the market. Below, we highlight these new funds from iShares in this currency-hedged market, and their main competitors for assets in this increasingly fierce space for investors who are looking to get in on this growing trend as well:

iShares Currency Hedged MSCI EAFE ETF: HEFA

For a broad foreign market play without the currency risks, investors could consider HEFA which focuses on the EAFE region—Europe, Australasia, Far East—for exposure. This product follows the MSCI EAFE 100% Hedged to USD index, holding just over 900 securities in its basket and charging a pretty low 39 basis points a year in fees.

The product is basically a holding of EFA with a currency hedged tacked on, giving it a focus on financials, industrials, and consumer stocks. Top nations include the UK, Japan, and Switzerland, while France and Germany round out the top five for this well-diversified fund (see all the Broad Developed World ETFs here).

EAFE Hedged ETF Competition: While there are a few European hedged ETFs on the market, there is really only one direct competitor at this time, the db X-trackers MSCI EAFE Currency Hedged Equity Fund (DBEF). This product is pretty popular too, as it has over $300 million in AUM, and a solid volume level as well, suggesting it will be a tough foe for HEFA.

iShares Currency Hedged MSCI Germany ETF: HEWG

This fund gives investors exposure to the German market without worrying about the influence of the euro’s fluctuations. The product charges investors 53 basis points a year in fees and it tracks the MSCI Germany 100% Hedged to USD Index.

This ETF is a play on iShares’ ultra-popular EWG with a hedge to strip out the euro currency exposure. As such, the fund holds about 60 securities in its basket with a focus on consumer discretionary, financials, and basic materials (see 7 ETFs to Buy in 2014).

Germany Hedged ETF Competition: There are currently two products in this space, DBGR and DXGE. While neither has developed a huge following the db X-trackers MSCI Germany Hedged Equity Fund (DBGR) currently has the lead in the space with about $40 million in AUM.  

iShares Currency Hedged MSCI Japan ETF: HEWJ

This ETF looks to match the local currency performance of stocks in Japan, allowing investors to take the yen out of Japan investing. The product charges investors 48 basis points a year in fees and it follows the MSCI Japan 100% Hedged to USD net TR Index.

The ETF is basically an investment in EWJ but with a currency hedge, holding over 300 stocks in its basket. Exposure is tilted towards consumer, industrial, and financial stocks, while Toyota Motor (TM) takes the top spot at just over 6% of assets.

Japan Hedged ETF Competition: The Japan hedged ETF market and it is currently dominated by DBJP and DXJ, though the lion’s share of the assets goes towards WisdomTree’s DXJ. This fund has close to $12 billion in assets under management, and it is actually approaching EWJ as the most popular Japan-focused ETF on the market (See 2 Japan Hedged ETFs for 2014).

Bottom Line

The currency-hedged ETF competition is really heating up and it is hard to say how many more funds the space can take for now. This is especially true considering that some markets, such as Japan, have already seen huge moves in their currency, while others, like Germany, haven’t really ever seen a big currency loss (at least in modern times).

Given this, it is hard to say how these new funds will compete, particularly considering the entrenched competition in some of the key markets. Still, it is iShares, and they tend to compete very well in every market so I wouldn’t count out these funds and the iShares machine just yet.

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Author is long EWG

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