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Top Ranked Currency Hedged ETFs in Focus on Dollar Surge - ETF News And Commentary

Zacks Equity Research

The monetary policy divergence across the globe led ETF investors to see the impact of currencies on their foreign holdings. This is truer in the light of rising rates speculations in the U.S. and the launch of the QE policy in the Euro zone amid deflationary woes in the region (read: Global Policy Easing Puts These ETFs in Focus).

A stronger-than-expected February job data in the U.S. with unemployment level of 5.5% touching a six-and-half year low and being within the 5.2-5.5% range, which the Fed considers as full employment level, took the greenback to a 12-year high to the Euro this March. 

Investors should note that the ECB will buy government bonds worth 60 billion euros a month through in a one-half year timeframe. The organization made it clear this time that the ECB would continue its bond buying program even if yields fall into the negative territory. However, the negative yield should not cross -0.2%, as it needs to be within the level of ECB's deposit rate.

Global Policy Easing on the Rise

To be competitive in the export markets, several other key European nations including Denmark, Sweden and Switzerland have cut interest rates in recent times and forcefully depreciated their currencies (read: Sweden ETF Up Post Rate Cut & QE Announcement).

Europe is not the only region reeling under the pressure of waning growth. Japan is also pursuing a massive stimulus program. Following a technical recession in Q2 and Q3, the Japanese Central Bank enhanced its asset buying program to 80 trillion yen a year in October end from the previous rate of 60–70 trillion yen (launched in April 2013).

While this gigantic Japanese stimulus sent stocks to a 15-year high in mid-February, the policies have devalued the Japanese currency to its multi-year low relative to the greenback. The Japanese yen lost about 21.7% to the USD (as of March 12, 2015) since April 2013 (read: 3 Top Ranked Hedged Japan ETFs in Focus).

Australia is yet another developed country which has jumped on the bandwagon of monetary easing. The Australian economy which enjoyed steady growth over the past two decades has lately been witnessing a slump. That is why its Central Bank cut the overnight cash rate by 25 bps to a record low 2.25% after August 2013 (read: Rate Cut Puts Aussie ETFs in Focus). 

Within the last one year, the Aussie dollar has lost about 15.2% against the USD and hovered around six-year lows. With consumer confidence for March retreating to a negative zone, we can expect a few more rate cuts in Australia and a resultant weakness in the currency. Meanwhile, Canada too joined the rate-cut rally to respond to oil price weakness and sagging growth.

Some investors may be surprised to know that emerging nations like India and Turkey, known for their high inflation profile, lately resorted to the rate cut route to spur growth. A massive oil price slump in the last eight months, which put a lock on global inflation, has made this possible. If this was not enough, Peru, Egypt, China and South Korea are all opting for monetary easing. In a nutshell, with both IMF and World Bank cutting their global growth forecast for this year and the next and the former emphasizing on the necessity of an easy money policy in most parts of the world, the rate cut cycle will play a crucial role in the coming days and so will currency depreciation of the concerned countries.

How to Play?

While the monetary easing makes these countries a compelling investment proposition for U.S. investors, a sliding currency hurts total returns, at least when repatriating back to dollars. For this reason, investors might want to consider a hedged currency play if they want to stay exposed to the gradual pickup in the global growth story, but don’t wish to be dragged down by adverse currency translation.

Below, we have profiled four top-ranked broad international ETFs for those who are looking for hedged exposure at this time (read: 3 ETFs to Fight Against Global Currency War):

WisdomTree Europe Hedged Equity Index Fund (HEDJ)

Investors loaded HEDJ in their portfolio for exposure to European stocks while at the same time for a hedge against any fall in the euro. The fund charges investors 58 basis points a year in fees and has amassed about $14 billion in assets. Germany is the top country in the fund.

In total, the fund holds about 123 securities in its portfolio, with a relatively spread out profile. Consumer staples, consumer discretionary and industrials all account for at least 18% of the assets, while none of these segments make up more than 23% of the total. The fund has Zacks ETF Rank #1 (Strong Buy) and is up about 18.7% so far this year (as of March 12, 2015).

WisdomTree Japan Hedged Equity Fund (DXJ)

This product looks to give investors exposure to broad Japanese markets while mitigating the fluctuations of the yen. Top sectors include; consumer discretionary, industrials and IT. The large-cap oriented fund has a huge asset base of $15.2 billion and charges 48 bps in fees. The fund is up 10.4% so far this year while it has a Zacks ETF Rank #1.

MSCI Europe Hedged Equity Fund (DBEU)

The fund looks to have an exposure in the European market and has amassed about $1.62 billion in assets. The fund charges 45 bps in fees. The fund is heavy on the financial sector (22.59%) followed by consumer staples (13.9%), healthcare (13.6%), discretionary (11.4%) and industrials sectors (11.3%). Great Britain is the top country in the fund with about 26.8% focus. The fund is up about 11% so far this year (as of March 12, 2015). DBEU has a Zacks ETF Rank #1.

iShares Currency Hedged MSCI EAFE ETF (HEFA)

For a broad foreign market play without currency risks, investors could also consider HEFA which focuses on the EAFE region — Europe, Australasia, Far East — for exposure. This product follows the MSCI EAFE 100% Hedged to USD index and is basically a holding of EFA with currency hedged tacked on. Financials dominates the fund’s return with one-fourth share.

Top nations include Japan and United Kingdom. The fund has AUM of $1.58 billion and average daily volume of roughly one million shares. It charges 39 bps in annual fees and expenses and has added 9.5% so far this year. HEFA has a Zacks ETF Rank #2 (Buy).

Bottom Line

The demand for currency hedging strategies is raging. While we have discussed just four funds above, investors should note that most ETFs in the space are simply crushing their traditional cousins. So apart from the said four, investors may take a look at other ETFs including  #1-ranked Currency Hedged MSCI EMU ETF (HEZU), #2-rated Deutsche X-trackers MSCI All World ex US Hedged Equity ETF (DBAW), and Deutsche X-trackers MSCI EMU Hedged Equity ETF (DBEZ). Apart from these, several Japanese and German currency-hedged ETFs have made a killing in the recent past.

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