Time to Buy Currency-Hedged ETFs?

A surging U.S. dollar generally knocks down the returns of international investments. This is because a strong greenback eats away foreign investment gains when repatriated in U.S. dollar terms, pushing them into the red even when international stocks are performing well.

The strength in the greenback would compel investors to recycle their portfolios into the currency-hedged ETFs. Among the most-popular currency hedged ETFs, iShares Currency Hedged MSCI EAFE ETF HEFA, WisdomTree Japan Hedged Equity Fund DXJ, WisdomTree Europe Hedged Equity Index Fund HEDJ and iShares Currency Hedged MSCI Eurozone ETF HEZU could make for excellent plays in a rising dollar environment.

These funds look to strip out currency exposure to a foreign economy via the use of currency forwards or other instruments that bet against the non-dollar currency while at the same time offer exposure to foreign stocks.

Inside the Dollar Surge

The U.S. dollar against a basket of currencies has been rising lately, soaring to a 20-year high. Rising fears of a global recession and Fed Chair Jerome Powell’s speech strengthened the greenback. The dollar has posted its biggest weekly gain since April 2020 (read: U.S. Dollar ETF Hits New 52-Week High).

Jerome Powell said that the Fed will likely need to keep interest rates high to slow the economy “for some time” to curb high inflation. While a tight monetary policy "for some time" will bring down inflation from a 40-year high, it also means slower growth, a weaker job market and "some pain" for households and businesses.

According to the CME FedWatch tool, nearly half of market participants expect the Fed funds rate to end the year above 3.7%, up from 40% a week ago. The Fed raised its benchmark federal-funds rate by 0.75 percentage points at each of its last two meetings to a range of 2.25% to 2.5%. Further, the inverted yield curve is signaling a massive ‘recession’ anytime soon, thereby lifting demand for the dollar as a safe-haven play.

Global Fundamentals

Currently, the global macroeconomic picture looks weak, given the tightening policies across several countries. Additionally, a slowdown in China, the lingering Russia-Ukraine crisis, and recession fears continue to weigh on the global stock market.

ETFs in Focus

iShares Currency Hedged MSCI EAFE ETF (HEFA)

iShares Currency Hedged MSCI EAFE ETF targets the developed international stock market in Europe, Australasia and the Far East with no currency risk. iShares Currency Hedged MSCI EAFE ETF tracks the MSCI EAFE 100% Hedged to USD Index (read: Dollar at 20-Year High: ETFs to Gain & Lose).

The fund has an AUM of $3.6 billion and trades in a solid volume of 738,000 shares. HEFA charges 35 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

WisdomTree Japan Hedged Equity Fund (DXJ)

With AUM of $2 billion, WisdomTree Japan Hedged Equity Fund targets the Japanese equity stock market without the currency risk by tracking the WisdomTree Japan Hedged Equity Index.

WisdomTree Japan Hedged Equity Fund trades in a solid volume of 562,000 shares per day and charges 48 bps in annual fees. It has a Zacks ETF Rank #3 with a Medium risk outlook (read: Are Currency-Hedged Japan ETFs Safer Bets Now?).

WisdomTree Europe Hedged Equity Index Fund (HEDJ)

WisdomTree Europe Hedged Equity Index Fund tracks the WisdomTree Europe Hedged Equity Index and offers exposure to the European market without any currency risk. The fund has AUM of $1.3 billion and sees an average daily volume of about 123,000 shares.

WisdomTree Europe Hedged Equity Index Fund charges 58 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares Currency Hedged MSCI Eurozone ETF (HEZU)

iShares Currency Hedged MSCI Eurozone ETF seeks to reduce the impact of the euro, relative to the U.S. dollar, on an allocation to Eurozone equities. It provides broad exposure to a wide range of exporters and local Europe-focused companies that may benefit from the European Central Bank's stimulus policies by tracking the MSCI EMU 100% USD Hedged Index (read: Time for Currency-Hedged International ETFs?).

iShares Currency Hedged MSCI Eurozone ETF has accumulated $363.5 million in its asset base while charging 53 bps in annual fees. It trades in an average daily volume of 101,000 shares and has a Zacks ETF Rank #3 with a Medium risk outlook.

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