Why Currency-Hedged ETFs Gained Popularity
To Hedge or Not to Hedge the US Dollar? (Part 5 of 6)
Adding a currency hedge to an international portfolio can help reduce this risk while still maintaining diversification benefits and exposure to potential growth opportunities outside the U.S. Exchange-traded funds (or ETFs) offer a convenient, low-cost way to potentially hedge the currency risk of your international investments. Indeed, investor interest has been remarkably strong during this recent cycle: Over the past three months, more than $15 billion flowed into currency-hedged ETFs (Source:Bloomberg and iShares).
Market Realist – You should consider currency-hedged ETFs to safeguard your foreign investments.
The graph above compares the one-month and three-month average daily volumes for the iShares Currency Hedged MSCI Japan ETF (HEWJ), the iShares Currency Hedged MSCI EAFE ETF (HEFA), and the iShares Currency Hedged MSCI EMU ETF (HEZU). These ETFs are currency-hedged siblings of Japanese (EWJ)(DXJ), developed market (EFA), and European (EZU) ETFs.
There was a higher one-month average daily volume compared to the three-month average daily volume. This suggests that the currency-hedged ETFs are gaining popularity among investors.
The one-month and three-month average daily volumes for HEWJ are ~327,000 and ~317,500 shares traded, respectively. The developed market currency-hedged ETFs have gained the most. HEFA has a one-month and three-month average daily volume of ~1.8 million and ~1.1 million, respectively. This ETF has been tremendously popular in the last month or so.
Recently, there has been a huge slump in the euro due to the introduction of QE (quantitative easing). US investors wanting to invest in European stocks (FEZ) resorted to currency-hedged ETFs. HEZU has one-month average daily volume of ~744,500 shares. This is nearly twice its three-month average daily volume of ~393,500 shares. This suggests a huge increase in demand for HEZU due to fears of the euro plummeting further.
If you want to invest in Germany (EWG), you should consider the iShares Currency Hedged MSCI Germany ETF (HEWG).
Meanwhile, a stronger US dollar (UUP) is a huge headwind for US stocks (DIA)(VOO). US stocks are export oriented.
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