Expanding upon its popular currency-hedged foreign equity strategies, BlackRock (BLK) iShares is working on a slew of currency-hedged adaptations of its global and country-specific exchange traded funds.
In anticipation of a strengthening U.S. dollar in response to Federal Reserve rate hikes ahead and loose-monetary-policy-fueled growth abroad, iShares is crafting currency-hedged versions of a number of its long-standing ETFs:
No tickers, stock exchange listings or expenses have been provided. All new planned ETFs are passively managed and track MSCI Indices hedged to the USD.
According to their respective Securities and Exchange Commission filings, the currency-hedged ETFs will invest at least 90% of assets in the related non-hedged iShares ETFs. Additionally, the currency-hedged ETFs will included foreign currency forward contracts at a one-month rate designed to hedge against non-U.S. currency fluctuations. The hedge is reset on a monthly basis. The new ETFs basically act as hedged versions of the originals.
“The notional exposure to foreign currency forward contracts (both deliverable and non-deliverable) will be a short position that hedges the currency risk of the equity portfolio,” according to the SEC filings. “The Fund may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, including shares of money market funds.”
When investing in overseas markets, U.S. investors are typically at risk to changes in the foreign exchange market – if the U.S. dollar strengthens or foreign currencies depreciate against the dollar, foreign-currency-denominated returns are lower when converted back into U.S.-dollar terms. Consequently, hedging against the depreciating foreign currency would provide a more true performance of the target foreign market. [Foreign Borrowers Could Fuel Dollar ETFs’ Rally]
“The Underlying Index is designed to have higher returns than an equivalent unhedged investment when the component currencies are weakening relative to the U.S. dollar,” according to the filings.
However, if the U.S. dollar depreciates or foreign currencies start strengthening against the USD, these currency-hedged ETFs may underperform non-hedged ETFs.
“Conversely, the Underlying Index is designed to have lower returns than an equivalent unhedged investment when the component currencies are rising relative to the U.S. dollar,” according to the filings.
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.