Currency hedged strategies are gaining immense popularity on a
strengthening U.S. dollar and the prospect of higher interest
rates. This is evident from the recent success of
WisdomTree Japan Hedged Equity Fund (
which has seen a surge in popularity, and has easily beaten out
unleveraged equity ETFs targeting the nation.
In order to tap this growing niche market, iShares, the world's
leading ETF provider, plans to expand in this popular corner of
investing and filed for three currency hedged equity funds
targeting Japan, Germany and the EAFE countries. These products
would provide investors to hedge their specific currencies through
forward currency contracts (read:
3 Currency ETFs Crushed in Emerging Market Rout
While a great deal of the key information - expense ratio or ticker
symbol - was not available in the initial release, other important
points were available in the filing. We have highlighted those
below for investors, who might be looking for a new currency hedged
equity play from iShares should it pass regulatory hurdles (see
more in the
iShares Currency Hedged MSCI Japan ETF in Focus
This fund looks to offer exposure to large and mid cap Japanese
stocks while at the same time provide a hedge against any fall in
the Japanese yen against the U.S. dollar. This will be done by
tracking the MSCI Japan 100% Hedged to USD Index.
The ETF looks to invest in derivative instruments, such as futures,
options and swaps, as well as money market instruments to offset
exposure to the Japanese yen. Thus, the fund looks to outperform
when the yen is sliding, and underperform unhedged benchmarks when
the yen is strengthening (read:
Time to Focus on Yen-Hedged Japan ETFs?
With that being said, the fund is likely to attract investor
interest as the hedged exposure technique has already been widely
accepted in Japan. However, the proposed product would face stiff
competition from two funds - DXJ and
db X-trackers MSCI Japan Hedged Equity (
DXJ has amassed over $10.5 billion in its asset base and charges 48
bps in fees and expenses while DBJP has just $162.6 million in AUM
and charges 50 bps in annual fees.
Further, the success of the proposed hedged ETF depends on the
Japanese economic prospects. Prime Minister, Shinzo Abe, has
started implementing its stimulus program in an effort to lift the
world's third largest economy out of feeble growth and deflationary
While Tokyo's successful bid to host the 2020 Olympics is injecting
optimism into the Japanese economy, it has taken a toll on the
Japanese yen. If the current trends continue, the iShares proposed
fund will not find it difficult to garner investor interest, if
Japanese Yen ETFs Fall on Olympics, Reduced Syria
iShares Currency Hedged MSCI Germany ETF in Focus
This proposed ETF looks to offer exposure to large and mid-cap
German stocks while at the same time provide hedge against any fall
in the euro against the U.S. dollar. This will be done by tracking
the MSCI Germany 100% Hedged to USD Index.
Like the Japanese fund, this ETF also seeks to outperform when the
euro weakens, and underperform unhedged benchmarks when the euro is
surging against the U.S. dollar.
Currently, Germany is leading the way for broad European recovery
after the U.K. The German economy is showing strong resilience and
a relatively solid footing compared to the other euro zone members.
Based on Eurozone recovery, euro has recently seen good trading
against the dollar. This trend could continue on rising consumer
confidence and less concerns on debt levels.
With respect to competition,
db X-trackers MSCI Germany Hedged Equity Fund (
would pose risk to the success of the proposed ETF. DBGR is a new
fund and has attracted $9.2 million in AUM since its debut four
months back. The fund has an expense ratio of 0.50% (read:
New Currency Hedged Germany ETF Hits the Market
However, the success of the proposed German product depends on the
timing of the launch, and the performance by the German economy and
iShares Currency Hedged MSCI EAFE ETF in Focus
This proposed fund looks to track the performance of the MSCIEAFE
100% Hedged to USD Index. It would provide exposure to large and
mid cap equities in Europe, Australasia, and the Far East countries
while offering hedging strategies against the fluctuations in the
component currencies versus U.S. dollar.
Like the other two funds, this ETF would also outperform when the
currencies of EAFE weakens and underperform when the currencies
surge against the U.S. dollar. This fund, if approved, could take a
hit from the
db X-trackers MSCIEAFE Hedged Equity Fund (
, which has $166.7 million in AUM and 0.35% in expense ratio.
Given the volatility in the developed markets, it is difficult to
say how the proposed MSCI fund from iShares will be received by
investors should it pass regulatory hurdles.
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DB-XT MS EA HDG (DBEF): ETF Research Reports
DB-XT MS GER HD (DBGR): ETF Research Reports
DB-XT MS JAP HD (DBJP): ETF Research Reports
WISDMTR-J HEF (DXJ): ETF Research Reports
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