Currency hedged strategies are gaining immense popularity on a strengthening U.S. dollar and the prospect of higher interest rates. This is evident from the recent success of WisdomTree Japan Hedged Equity Fund (DXJ) which has seen a surge in popularity, and has easily beaten out unleveraged equity ETFs targeting the nation.
In order to tap this growing niche market, iShares, the world’s leading ETF provider, plans to expand in this popular corner of investing and filed for three currency hedged equity funds targeting Japan, Germany and the EAFE countries. These products would provide investors to hedge their specific currencies through forward currency contracts (read: 3 Currency ETFs Crushed in Emerging Market Rout).
While a great deal of the key information – expense ratio or ticker symbol – was not available in the initial release, other important points were available in the filing. We have highlighted those below for investors, who might be looking for a new currency hedged equity play from iShares should it pass regulatory hurdles (see more in the Zacks ETF Center):
iShares Currency Hedged MSCI Japan ETF in Focus
This fund looks to offer exposure to large and mid cap Japanese stocks while at the same time provide a hedge against any fall in the Japanese yen against the U.S. dollar. This will be done by tracking the MSCI Japan 100% Hedged to USD Index.
The ETF looks to invest in derivative instruments, such as futures, options and swaps, as well as money market instruments to offset exposure to the Japanese yen. Thus, the fund looks to outperform when the yen is sliding, and underperform unhedged benchmarks when the yen is strengthening (read: Time to Focus on Yen-Hedged Japan ETFs?).
With that being said, the fund is likely to attract investor interest as the hedged exposure technique has already been widely accepted in Japan. However, the proposed product would face stiff competition from two funds – DXJ and db X-trackers MSCI Japan Hedged Equity (DBJP).
DXJ has amassed over $10.5 billion in its asset base and charges 48 bps in fees and expenses while DBJP has just $162.6 million in AUM and charges 50 bps in annual fees.
Further, the success of the proposed hedged ETF depends on the Japanese economic prospects. Prime Minister, Shinzo Abe, has started implementing its stimulus program in an effort to lift the world’s third largest economy out of feeble growth and deflationary pressure.
While Tokyo's successful bid to host the 2020 Olympics is injecting optimism into the Japanese economy, it has taken a toll on the Japanese yen. If the current trends continue, the iShares proposed fund will not find it difficult to garner investor interest, if approved (read: Japanese Yen ETFs Fall on Olympics, Reduced Syria Worries).
iShares Currency Hedged MSCI Germany ETF in Focus
This proposed ETF looks to offer exposure to large and mid-cap German stocks while at the same time provide hedge against any fall in the euro against the U.S. dollar. This will be done by tracking the MSCI Germany 100% Hedged to USD Index.
Like the Japanese fund, this ETF also seeks to outperform when the euro weakens, and underperform unhedged benchmarks when the euro is surging against the U.S. dollar.
Currently, Germany is leading the way for broad European recovery after the U.K. The German economy is showing strong resilience and a relatively solid footing compared to the other euro zone members.
Based on Eurozone recovery, euro has recently seen good trading against the dollar. This trend could continue on rising consumer confidence and less concerns on debt levels.
With respect to competition, db X-trackers MSCI Germany Hedged Equity Fund (DBGR) would pose risk to the success of the proposed ETF. DBGR is a new fund and has attracted $9.2 million in AUM since its debut four months back. The fund has an expense ratio of 0.50% (read: New Currency Hedged Germany ETF Hits the Market (DBGR)).
However, the success of the proposed German product depends on the timing of the launch, and the performance by the German economy and euro.
iShares Currency Hedged MSCI EAFE ETF in Focus
This proposed fund looks to track the performance of the MSCIEAFE 100% Hedged to USD Index. It would provide exposure to large and mid cap equities in Europe, Australasia, and the Far East countries while offering hedging strategies against the fluctuations in the component currencies versus U.S. dollar.
Like the other two funds, this ETF would also outperform when the currencies of EAFE weakens and underperform when the currencies surge against the U.S. dollar. This fund, if approved, could take a hit from the db X-trackers MSCIEAFE Hedged Equity Fund (DBEF), which has $166.7 million in AUM and 0.35% in expense ratio.
Given the volatility in the developed markets, it is difficult to say how the proposed MSCI fund from iShares will be received by investors should it pass regulatory hurdles.
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