Hedging Currency Risk with ETFs

The universe of equity hedged ETFs continues to grow with the introduction of three new products from Deutsche Asset & Wealth Management this week. The niche group of ETFs have garnered attention after the success of the WisdomTree Japan Hedged Equity ETF DXJ. The ETF now has over $10.8 billion in total assets.

Investing in individual countries or regions around the globe has been popular for many years via ETFs. However, investors have often been at the mercy of currency fluctuations that would greatly alter the actually performance of the index the ETF is designed to track. Japan is a great example for U.S.-based ETF investors. The iShares MSCI Japan Index ETF EWJ is up 20% in 2013, as DXJ has been able to gain 25%. The difference is due to the Japanese Yen falling by approximately 10% this year.

As the local currency of an international ETF declines in value versus the U.S. Dollar it will have a negative affect on the return of the ETF. Hedged equity ETFs attempt to remove this affect by initiating short positions in the local currency to mitigate any currency movements.

3 New Hedged Equity ETFs

db X-trackers MSCI Asia Pacific ex Japan Hedged Equity Fund DBAP

The ETF offers exposure to equities in 12 Asian countries, excluding Japan. The combination of four developed and eight emerging countries in the ETF are led by Australia, China, and South Korea. Unlike a typical Asian ETF, DBAP will take short positions in select Asia-Pacific currencies to hedge against fluctuation between the currencies and the U.S. Dollar. The expense ratio is 0.60%.

db X-trackers MSCI Europe Hedged Equity Fund DBEU

The ETF provides investors with a basket of stocks based in the European Union with heavy exposure to the U.K., France, Switzerland, and Germany. The hedging is accomplished with several short currency positions, the two largest being the Euro and the British Pound. The expense ratio is 0.45%.

db X-trackers MSCI United Kingdom Hedged Equity Fund DBUK

With a sole focus on investing in the U.K., this ETF will attempt to remove all currency fluctuations between the British Pound and the U.S. Dollar. The consumer staples and financials make up nearly half of the ETF allocation and the top ten holdings, all large-cap stocks, account for 43% of the ETF. The expense ratio is 0.45%.

The new offerings by Deutsche increase their collection of hedged equity ETFs to eight and I would not be surprised to see this area continue to grow with more ETF providers joining the fray.

The hedged equity ETF sector has been one of the fastest growing areas in the last year and that trend should continue as investors search for new innovative offerings. If the U.S. Dollar starts to rally as the Fed begins to taper, the hedging equity ETFs could begin to outperform their counterparts in the years ahead. This is definitely one area to consider when investing money globally.