Returning To Some Popular ETF Trades

The WisdomTree Inter Hedged Eq Fund HEDJ and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF, DBX ETF Trust DBEF, are still the top two asset-gathering exchange traded funds on a year-to-date basis, having hauled in more than $28.6 billion combined.

Additionally, the WisdomTree Japan Hedged Equity Fund DXJ is still among the top 10 asset gatherers as well.

However, with the dollar recently faltering as traders pare back expectations that the Federal Reserve will raise interest rates next month and with the euro and yen seeing safe-haven buying in the midst of turmoil across global financial markets, it might be easy to assume some of this year's most popular ETF trades among professional investors are losing momentum.

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'Just' $5.9 Billion

“ETFs that hedge against currency risk have attracted just $5.9 billion since the end of June as a rally in the greenback slowed. That compares with the $41 billion they lured in the first six months of the year, when a surging dollar imperiled international returns for U.S. investors,” according to Bloomberg as of August 19.

“Just” $5.9 billion is no small sum and it bears noting that DBEF, a currency hedged play on the widely followed MSCI EAFE Index, and HEDJ have added over $3.8 billion combined in the current quarter. Only the Vanguard 500 Index Fund VOO has added more new money this quarter than DBEF.

The Currency-Hedged Asset Class

Recently slowing momentum for currency hedged ETFs does not mean investors should abandon the asset class altogether. In fact, some market observers see opportunity with some of these funds, even as some professional investors get skittish about the dollar rally.

“The trades everyone had on at the beginning of the year, and have either since abandoned or plan to this week, are likely the trades that work into year-end–that is, a steeper curve in fixed income, strong U.S. dollar, long Japanese and European equities currency hedged, etc.,” said Rareview Macro founder Neil Azous in a recent note.

A German Example

Azous highlighted the iShares Currency Hedged MSCI Germany ETF, iShares Trust HEWG, as a potential area of opportunity following the savage correction endured by Germany's benchmark DAX. There is a DAX-tracking ETF here in the U.S., the Recon Capital DAX Germany ETF DAX. Even with Tuesday's 3.1 percent gain, DAX is still down more than 5 percent over the past month.

Azous noted that German stocks are further along in their correction phase than their broader European and U.S. counterparts. Perhaps the green light on the hedged Germany trade, at least for contrarians, is this anecdote: Investors are abandoning the trade.

Including HEWG, there are three euro-hedged Germany ETFs trading in New York and all three have lost assets this quarter to the tune of over $55 million.