Have Your Cake And Eat It, Too With Currency Hedged Dividend ETFs
One thing issuers of exchange traded funds are particularly adept at is milking a hot a theme. That is certainly true of currency hedged funds, which are among this year's top asset-gathering ETFs.
Consider this: In a single day earlier this year, BlackRock Inc.'s (NYSE: BLK) iShares unit, the world's largest issuer of ETFs, launched 11 currency hedged products. On Aug. 12 and Aug. 19, Deutsche Asset & Wealth Management (Deutsche AWM) launched a combined 10 currency hedged ETFs.
Deutsche AWM's Aug. 12 launches were comprised of a quartet of dividend ETFs with currency hedged kickers. Those new funds are the Deutsche X-trackers ACWI ex-U.S. High Dividend Yield Hedged Equity ETF (NYSE: HDAW), Deutsche X-trackers Emerging Markets High Dividend Yield Hedged Equity ETF (NYSE: HDEE), Deutsche X-trackers EAFE High Dividend Yield Hedged Equity ETF (NYSE: HDEF) and the Deutsche X-trackers Eurozone High Dividend Yield Hedged Equity ETF (NYSE: HDEZ).
The marriage of dividends and currency hedging via ETFs, particularly developed market funds, makes sense. Especially at a time when equity markets in several major developed markets, including Australia, Germany and Japan, sport higher dividend yields than the yields on those countries' benchmark government bonds.
“Given the importance these products attach to dividends, it’s worth quickly recapping two related theories from corporate finance: Dividend Irrelevance and Dividend Signaling. The theory of Dividend Irrelevance would level two charges at a highdividend strategy; that investors can simply recreate their own dividends by selling stock and that dividend policy cannot impact a firm’s value,”' said Deutsche AWM in a research piece out Thursday. “We believe these concerns are not valid here for two reasons. First, because the theory assumes zero transaction costs, which is unrealistic; it is unlikely that investors would want to go to the trouble and expense of selling down their holdings on a quarterly basis to recreate dividend yields. Second, the assertion that dividend policy doesn’t affect a firm’s valuation has been challenged by more recent evidence that higher-yielding stocks might actually outperform the market over the long run.”
The Deutsche X-trackers ACWI ex-U.S. High Dividend Yield Hedged Equity ETF tracks the MSCI ACWI ex USA High Dividend Yield US Dollar Hedged Index, the currency hedged equivalent of the widely followed MSCI ACWI ex USA Index.
The new ETF holds nearly 230 stocks, a third of which are financial services names, according to issuer data. Over a third of HDAW's geographic weight is allocated to the UK, an important trait because after the US, the UK is the second-largest developed markets dividend market and one of a small number of markets that has, in recent years, offered dividend growth on par with the US.
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