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Is the Time Ripe for 50% Currency Hedged ETFs?

Zacks Equity Research

The global currency world has been on a tumultuous ride on central banks’ comments. The basic perception has been that the currency-hedged developed market ETFs will be on a roller-coaster ride since the second half of 2015 and in 2016 on divergent economic policies between the U.S. and others.

So far, the investing trend has paralleled the belief as the greenback peaked to multi-year highs on looming policy tightening and currencies like euro and yen plunged on the ongoing QE measures. However, the trend was volatile at the start of December.

While the Fed repeatedly put stress on a slower rate hike trajectory once the action is taken, the European Central Bank (ECB) – widely viewed as stepping up its QE measure – fell short of expectations. The ECB maintained the amount of monthly government bonds purchase at €60 billion. Additionally, the cut in deposit rates (by 10 bps) was also below the expected 0.15–0.20% (read: ECB Action Disappoints: ETFs in Focus).

Thanks to a less dovish ECB, the common currency euro surged and logged its largest one-day gain against the greenback in over six years. CurrencyShares Euro Trust (FXE) was up 3.2% on December 3. Across the pond, the Fed is preparing for a rate hike this month, but is expected to apply a petite and slow hike which in turn can cut some strength from the greenback.

Now that the oil price is due for more pain ahead with OPEC members agreeing on pumping up more oil, global inflation will remain for a few more months.  This leaves the Fed with no option other than taking the policy tightening issue easy. After all, the U.S. economy is yet to meet a key Fed agenda of 2% inflation.

Plus, the greenback has advanced over 7% so far this year (as of December 7, 2015). The U.S. dollar ETF PowerShares DB US Dollar Bullish ETF (UUP) is now just 3.2% down from the 52-week high price indicating less upside potential from the current level.

All in all, though the greenback is likely to remain strong ahead and euro is likely to weaken, volatility is likely to crop up now and then. In the last five sessions (as of December 7, 2015), UUP lost over 1.3% while FXE gained about 2.4%.

This might put the currency hedging global investing at risk. Notably, currency hedging is a beneficial technique when the USD is strengthening relative to the concerned foreign currency. But investors would incur losses on repatriating their foreign income while the USD is falling (read: Top Ranked Currency Hedged ETFs in Focus on Dollar Surge).

What About 50% Hedging Strategy?

In this backdrop, a 50% hedged ETF can be an intriguing option to minimize risks and sail through all kind of market dynamics. Below we highlight three ETFs that could be in watch in the coming days, if the U.S. dollar slips and other currencies strengthen on central bank policies and economic developments. These funds may guard your portfolio from extreme situations and will likely deliver moderate returns.

IQ 50 Percent Hedged FTSE International ETF (HFXI)

The fund follows the FTSE Developed ex North America 50% Hedged to USD Index and has amassed about $41.6 million in assets after debuting in July. The fund charges 35 bps in fees. The fund added over 2.1% in the last three months (as of December 7, 2015) (see all broad developed world ETFs here).
 
IQ 50 Percent Hedged FTSE Europe ETF (HFXE)
 
The $37.6-million fund tracks the FTSE Developed Europe 50% Hedged to USD Index. The fund charges 45 bps in fees and was up about 1% in the last three months (as of December 7, 2015).
 
IQ 50 Percent Hedged FTSE Japan ETF (HFXJ)

The $26.6-million fund looks to follow the FTSE Japan 50% Hedged to USD Index. The fund charges 45 bps in fees and gained over 7% in the last three months.

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IQ-50P HDG INTL (HFXI): ETF Research Reports
 
IQ-50P HDG EUR (HFXE): ETF Research Reports
 
IQ-50P HDG JPN (HFXJ): ETF Research Reports
 
CRYSHS-EURO TR (FXE): ETF Research Reports
 
PWRSH-DB US$ BU (UUP): ETF Research Reports
 
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