The world economy is presently seeing two stark different policy tools. While the most powerful nation, the U.S. has resorted to monetary policy tightening, other developed nations are following a loose monetary policy.
This policy differential has led to the appreciation of the dollar against a basket of other developed market currencies, adversely impacting the U.S. dollar returns on foreign currency holding (read: ETF Asset Report of 1H: Currency Hedging Tops; US Flops ).
This is prompting issuers to come out with hedged ETFs to play the international space. In fact, WisdomTree has recently launched one such ETF - WisdomTree International Hedged Equity Fund - which trades under the ticker HDWM .
HDWM in Focus
The newly launched fund seeks to track the WisdomTree International Hedged Equity Index to provide exposure to dividend-paying companies in the developed world ex U.S. and Canada while hedging exposure to fluctuations between the U.S. dollar and foreign currencies (read : 2 Excellent Dividend Growth ETFs in Focus ).
With this focus, the index currently holds a well-diversified basket of 746 stocks with HSBC Holdings Plc, BP Plc and Novartis AG as the top three holdings. In fact, the fund also provides a nice exposure to various sectors. Banks top the list with 13.5% allocation, followed by Energy and Pharmaceuticals Biotechnology & Life Sciences with 9.10% and 8.26% allocation respectively.
Country-wise, United Kingdom takes the first spot with a little less than one-fourth allocation, followed by Japan (13.84%), France (9.58%), Switzerland (8.54%) and Australia (8.08%). The fund also provides exposure to countries like Germany, Hong Kong, Spain, Sweden, Italy and Singapore each with less than 8% allocation.
How Does it Fit in a Portfolio?
This ETF could be appropriate for investors seeking a currency hedged play in the developed international arena. Currency hedging as a technique has gained a lot of popularity since the start of the year to invest in developed market economies like Europe and Japan. This is because a number of countries across the globe have chosen easy monetary policies by cutting interest rates or have used other measures to boost their dwindling growth and prevent deflationary pressures in their economies. On the other hand, the U.S. Fed is aiming an interest rate hike sometime later in the year.
The diverging monetary policies have devalued European, Japanese and other developed market currencies, while the greenback has strengthened on rising interest rate concern.
Thus, given monetary easing, international investment has become a compelling opportunity. However, given the strong dollar, investors would do well to invest in currency hedged ETFs.
There are some hedged ETFs in the developed market space. db X-trackers MSCI EAFE Currency Hedged Equity Fund ( DBEF ) is expected to the biggest threat to the newly launched fund. The fund manages an asset base of $12.6 billion and trades with good volumes of 3.6 million shares (read: PowerShares Plans Hedged Low Volatile International ETF ).
The fund tracks the MSCI EAFE US Dollar Hedged Index to provide exposure to equity securities in the developed international stock markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and non-U.S. currencies. The fund allocates 68% of its assets to European companies, while channeling the rest to the Asian market. DBEF charges 35 basis points as fees and is up 12.5% in the year-to-date frame.
iShares Currency Hedged MSCI EAFE ETF (HEFA) is another product with an asset base of $2.8 billion and an average trading volume of 1.3 million shares. The fund provides a hedged exposure to large- and mid-capitalization equities in Europe, Australasia, and the Far East. Country-wise, Japan takes the top spot with 22% exposure, followed by 20% allocation to the U.K. The fund charges 35 basis points as fees and is up 12.5% this year (see all Broad Developed World ETFs here ).
Thus, the newly launched ETF is expected to face competition from some of the veterans in the space. However, given the huge popularity of hedged ETFs presently, the fund might garner a decent asset base.