Currency Hedged ETFs on the Rise

As advisors and investors have become increasingly aware of the potentially erosive effects of currency fluctuations on portfolios, currency hedged exchange traded funds have gained appeal.

Not only has the population of currency hedged ETFs swelled, but so have assets allocated to these funds. “After starting in equities, hedged ETFs have infiltrated every asset class and grown 1,000 percent to $15 billion since the start of 2013,” reports Eric Balchunas for Bloomberg.

The bulk of assets parked in hedged ETFs are found in one fund: The $12 billion WisdomTree Japan Hedged Equity Fund (DXJ) . DXJ surged 41% last year as the yen plunged and only the SPDR S&P 500 ETF (SPY) brought in more assets. “Since DXJ’s success, the number of currency hedged ETFs has tripled,” writes Balchunas in the Bloomberg piece. [Currency Hedged ETF Competition Heats Up]

Just this year, at least six currency hedged ETFs have come to market, including three from BlackRock’s iShares, the firm’s first foray into hedged currency ETFs. While hedged yen ETFs such as DXJ and the db X-trackers MSCI Japan Hedged Equity Fund (DBJP) are among the more recognizable funds in this genre, that does not mean there are not other success stories.

For example, the WisdomTree Europe Hedged Equity Fund (HEDJ) is closing in on $1 billion in assets under management while the db X-trackers MSCI EAFE Hedged Equity Fund (DBEF) has nearly $370 million in assets. Although it is still small, the db X-trackers MSCI Germany Hedged Equity Fund (DBGR) has seen its AUM tally double this year. [Don't Forget These Currency Hedged ETFs]

Increased inflows to the likes of DBGR and HEDJ could be a sign that some investors believe the rally in European equities can continue, but also that the euro is overvalued. Of course, that is the rub with currency hedged ETFs and those funds with short euro exposure paint that picture. Eurozone stocks have risen alongside the euro, leaving currency hedge Europe ETFs behind their unhedged rivals.

Same goes for the two ETFs that provide hedged sterling exposure to U.K. equities, which have also recently been solid performers. [These ETFs Soar as British Stocks Rally]

While some have argued that long-term investors do not need to be overly concerned with currency fluctuations, DXJ and DBJP have already proven the utility of currency hedged exposure in portfolios.

Additionally, euro and sterling-hedged ETFs are not old ETFs and have endured extended periods of strength in those currencies. For example, DBGR is less than three years old and HEDJ was converted to a hedged euro ETF in the third quarter of 2012. The sterling hedged ETFs from WisdomTree and Deutsche Bank are an average of eight months old, proving that neither has traded in a period of sustained weakness for the British pound.

WisdomTree Europe Hedged Equity Fund

Tom Lydon’s clients own shares of HEDJ and SPY.