Reduce Rupee Risk With This New ETF

India stocks and related ETFs have been among the best emerging market assets for several years. For many market participants, that’s enough. But U.S. investors should still account for currency risk. The WisdomTree India Hedged Equity Fund (INDH), which launched on May 9, assists in that endeavor. And the rookie ETF’s arrival could prove well-timed, because India equities are rallying. And the rupee has long had a reputation for being a volatile emerging market currencies.

As is the case with the other WisdomTree currency hedged ETFs, INDH employs a straightforward approach. Its underlying benchmark – the WisdomTree India Hedged Equity Index – is home to the 75 largest India firms as measured by market value. It's designed to mitigate rupee/dollar fluctuations.

INDH Could Prove Useful

Some investors might be apt to wonder about the utility of INDH. After all, on an unhedged basis, India stocks have performed well in recent years. The WisdomTree India Earnings Fund (EPI), one of the largest ETFs in the category, is up almost 47% over the past three years.

Add to that, some experts believe there isn’t long-term utility in currency hedging. But the WisdomTree Japan Hedged Equity ETF (DXJ) and the WisdomTree Europe Hedged Equity Fund (HEDJ) render that argument inaccurate. All of that is to say INDH could reward long-term investors. At the very least, the fund could reduce some of the currency volatility associated with India stocks.

“On average (since 2018), USD investors saw the volatility of their India exposure reduced by an average 3.5% annually when hedging out currency movements. This brought the volatility of their India exposure closer to—if not below—that of U.S. equity markets,” noted Alejandro Saltiel, WisdomTree head of indexes.

Cost of Hedging Rupee Exposure Has Noticeable Declined

Another knock on currency hedging, regardless of region, is that it subjects investors to higher costs. But the cost of hedging rupee exposure has declined noticeably in recent years. Additionally, while currency-hedged ETFs carry higher expense ratios than unhedged counterparts, the performances of DXJ, EPI, and HEDJ have rendered those fee differentials moot.

Some higher-fee currency-hedged ETFs have outpaced unhedged rivals by such wide margins that the lower fees on the unhedged offerings weren’t worth embracing. It’s possible INDH will follow in those footsteps.

“By incorporating a currency hedge, INDH mitigates the impact of the Indian rupee’s volatility, ensuring that investors can maintain their exposure to Indian equities without the added uncertainty of currency movements relative to the U.S. dollar,” concluded Saltiel. “This strategic approach allows investors to focus on the intrinsic value and growth potential of Indian companies rather than worrying about the adverse effects of exchange rate fluctuations on their investments.”

For more news, information, and analysis, visit the Modern Alpha Channel.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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