Hedged ETFs Working Well in 2013
Just over two months into 2013, the foreign currency market has already told traders and investors this could be the year of the currency war. That is not surprising as some global central banks, such as the Federal Reserve, have shown deep commitments to monetary easing.
On the other hand, other central banks such as those in Australia, New Zealand and select emerging markets, have displayed reluctance to reluctance to engage in money printing. The result is debasement of some developed market currencies much to chagrin of non-easing countries that count low-yielding currency countries such as the U.S. and Japan among their important trading partners.
In some cases, the burgeoning global currency war has prompted increased volatility for some currencies, leading some investors to ponder the virtues of hedged currency ETFs. Year-to-date, returns to some currency hedged equity-based ETFs do underscore the notion that investors are looking for ways to skirt currency volatility. The following ETFs indicate as much:
WisdomTree Japan Hedged Equity Fund (NYSE: DXJ) In a matter of months, the WisdomTree Japan Hedged Equity Fund has become the undisputed king of the hedged currency ETF space. Simply put, DXJ is one of 2013's fastest-growing and most popular ETFs tracking any asset class. On February 7, DXJ had $2.8 billion in assets under management. That was a more than fivefold increase from mid-December.
However, as Japanese Prime Minister Shinzo Abe has talked the talk regarding higher inflation and a weaker yen, Japan's currency has plunged, making DXJ a highly sought after destination for investors. To that end, the ETF entered trading Monday with $4.35 billion in AUM, according to WisdomTree data.
Clearly, investors have embraced DXJ's two-pronged approach that guards against USD/JPY fluctuations while providing exposure to Japanese firms that are not highly dependent on Japan to generate the bulk of their revenue. DXJ has gained about 12.5 percent year-to-date. That is more than double the returns offered by the iShares MSCI Japan Index Fund (NYSE: EWJ), indicating that a a preference for the unhedged EWJ is indeed a costly mistake.
db X-trackers MSCI EAFE Hedged Equity Fund (NYSE: DBEF) Diminutive size and average daily volume of less than 12,000 shares are probably the culprits behind many investors not knowing about the db X-trackers MSCI EAFE Hedged Equity Fund. Still, investors that are long the popular iShares MSCI EAFE Index Fund (NYSE: EFA) or a comparable broad developed market ETF might want to have a look at DBEF.
Home to 560 stocks from Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom, DBEF hedges moves in the U.S. dollar and non-dollar currencies.
The strategy has worked well this year as DBEF is up 7.2 percent compared to 2.2 percent for the unhedged EFA. DBEF is home to plenty of familiar names as well, include Nestle (OTC: NSRGY), HSBC (NYSE: HBC) and BP (NYSE: BP).
WisdomTree Europe Hedged Equity Fund (NYSE: HEDJ) Though not to the extend to DXJ, HEDJ has been an impressive asset-gather since the fund was reconfigured in August. Since becoming a hedged euro play on Eurozone dividend-paying stocks, the fund has seen its AUM total rise from $15.3 million in August to $41.6 million today. Uncertainty pertaining to Italy's recent election results has given some investors pause about being long Eurozone equities and the subsequent currency risks. In a recent research note, WisdomTree Research Directo Jeremy Schwartz highlights the impact euro volatility has had on European stock indexes over one-, three-, five- and 10-year time horizons.
"In a number of other markets, such as Europe, hedging currency has a different, yet equally important, motivating factor: it helps reduce volatility. The euro is a prime candidate for hedging, in my view, given all the uncertainty that still surrounds the eurozone," said Schwartz in the note.
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