New ETFs Answer Currency Hedging Questions

To currency hedge or not to currency hedge. Hamlet never pondered that scenario, but some investors using exchange traded funds are likely to ponder that question. It is a good thing some ETF issuers have already come up with answers.

Earlier this week, BlackRock Inc.'s BLK iShares unit unveiled three new ETFs that feature currency hedging flexibility, meaning the ETFs can be entirely hedged, not currency hedged at all or somewhere in between.

The new ETFs are the iShares Adaptive Currency Hedged MSCI EAFE ETF  DEFA, iShares Adaptive Currency Hedged MSCI Eurozone ETF  DEZU and the iShares Adaptive Currency Hedged MSCI Japan ETF  DEWJ.

“The iShares Adaptive Currency Hedged ETFs seek to track investment results of MSCI indices composed of large-and mid-cap international equities, while systematically determining whether to hedge, unhedge or partially hedge currency risk for a U.S. dollar-based investor. By periodically shifting their hedge ratios, the funds aim to adapt to different currency environments -- for example, seeking to capture positive foreign currency returns when the U.S. dollar weakens relative to the local currency and minimize negative foreign currency return when it strengthens.  Each fund will have a hedge ratio between 0-100% that is determined each month based on four commonly-used currency indicators: interest rate differentials, relative valuation, volatility and momentum,” said iShares in a statement.

iShares rival WisdomTree Investments Inc. WETF, the fifth-largest U.S. ETF issuer, introduced its own lineup of dynamically currency hedged ETFs on Thursday. The new WisdomTree ETFs use three metrics to determine the funds' level of currency hedging: momentum, interest rate differential and value. For example, if the United States has higher interest rates than the country or region being targeted by one of the new ETFs, it makes sense for that fund to be close to or fully hedged. 

“The iShares Adaptive Currency Hedged MSCI EAFE ETF seeks to track the investment results of an index composed of large- and mid-capitalization equities in Europe, Australasia, and the Far East while dynamically hedging currency risk for a U.S. dollar based investor,” according to iShares. 

DEZU, which uses the dynamic currency hedged combined with the iShares MSCI Eurozone ETF EZU, devotes more than 71 percent of its weight to French, German and Spanish stocks. Those three of the four largest Eurozone economies.

The iShares Adaptive Currency Hedged MSCI Japan ETF follows a similar methodology, combining the shifting currency hedged overlay with the iShares MSCI Japan ETF EWJ.

The new ETFs bring the size of the iShares currency hedged suite to 26 ETFs.