With the U.S. dollar strengthening against a basket of foreign currencies ahead of an expected Federal Reserve monetary tightening cycle, Northern Trust’s FlexShares exchange traded fund division has launched currency-hedged versions of its popular multi-factor developed and emerging market ETFs.
Flexshares has launched the FlexShares Currency Hedged Morningstar EM Factor Tilt Index Fund (TLEH) and the FlexShares Currency Hedged Morningstar DM ex-US Factor Tilt Index Fund (TLDH) , according to a press release.
“International equity exposure is a core element of many portfolios seeking long-term growth as developed markets allow investors to expand their opportunity set beyond U.S. borders. Our research shows that employing a tilted approach to capturing size and value factors potentially adds value to global equity strategies,” Shundrawn A. Thomas, head of Northern Trust’s Funds and Managed Accounts Group, said in the press release. “Currency fluctuations, however, add complexity when implementing an international strategy, especially during times of monetary intervention. By hedging the currency exposure in a tilted strategy, the resulting portfolio may provide optimal exposure while reducing potential volatility from currency fluctuations.”
Specifically, the Factor Tilt may focus on investment characteristics based on factors like market capitalization and industry weighting, fundamental characteristics such as return variability and yield, and liquidity measures.
Additionally, both currency-hedged ETFs will include one-month currency forwards contracts to diminish the potential volatility in currencies with respect to the U.S. dollar – if foreign currencies depreciate against the greenback, international equities may generate a lower USD-denominated return. However, potential investors should be aware that if the foreign currencies appreciate against the USD, these currency-hedged ETFs may underperform non-hedged funds.
TLEH tries to reflect the performance of the Morningstar Emerging Markets Factor Tilt Hedged Index, which tries to enhance exposure to developing markets by tilting toward long-term growth potential of small-cap and value segments while hedging against currency risks.
The currency-hedged emerging market ETF includes a heavier tilt toward smaller companies than other market capitalization-weighted emerging market funds. TLEH’s market-cap weights include 6.2% micro-cap, 30.5% small-cap, 22.4% mid-cap and 40.9% large-caps. Additionally, the Factor Tilt may also contribute to the greater 44.1% weight in the value style, along with 31.7% blend and 24.2% growth.
TLEH essentially acts like a hedged version of FlexShares’ popular emerging market fund, the FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (TLTE) . The new ETF includes a 100% position in TLTE but counteracts currency risks with currency forwards that correspond with its country weights, including Hong Kong, South Korea, Taiwan, India, South Africa, Brazil, Mexico, Malaysia, Thailand and Russia.
TLDH tries to reflect the performance of the Morningstar Developed Markets ex-US Factor Tilt Hedged Index, which tries to enhance exposure to international stock markets by tilting toward long-term growth potential of smaller-cap and value segments while hedging foreign exchange fluctuations.
The currency-hedged developed markets ETF also leans toward small-caps and value. Market-cap weights include micro-cap 0.38%, small-cap 29.7%, mid-cap 14.7% and large-cap 56.2%. Style weights include value 43.0%, blend 32.9% and growth 24.1%.
TLDH also includes a position in the non-hedged FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (TLTD) , along with currency forwards to hedge against currencies of Japan, U.K., France, Canada, Germany, Switzerland, Australia, Hong Kong, Italy and Sweden.
For more information on new fund products, visit our new ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.