FlexShares Enters Currency Hedged ETF Fray

Currency hedged exchange-traded funds, one of this year's fastest growing and most prolific asset-gathering segments of the ETF universe, are continuing that rapid population growth as more issuers enter the fray.

Newcomers On Deck

That includes Northern Trust Corporation NTRS's FlexShares unit, which launched its first two currency hedged ETFs this week. Those new ETFs are the FlexShares Currency Hedged Morningstar DM ex-US Factor TLDH and the FlexShares Currency Hedged Morningstar EM Factor Tilt TLEH.

Related Link: New ETF Goes Global For Small-Cap Dividends

Dollar strength in anticipation of higher interest has fueled a massive influx of assets to currency hedged ETFs, putting three such funds – the WisdomTree Inter Hedged Eq Fund HEDJ, Deutsche X-Trackers MSCI Europe Hedged Equity ETF (DBX ETF Trust DBEF) and the WisdomTree Japan Hedged Equity Fund DXJ – among this year's top asset-gathering ETFs.

Currency And Strategy

“Currency fluctuations, however, add complexity when implementing an international strategy, especially during times of monetary intervention. By hedging the currency exposure in a tilted strategy, the resulting portfolio may provide optimal exposure while reducing potential volatility from currency fluctuations,” said Shundrawn Thomas, head of Northern Trust's Funds and Managed Accounts Group, in a statement.

A Closer Look At The New Names

The FlexShares Currency Hedged Morningstar DM ex-US Factor Tilt Index Fund and the FlexShares Currency Hedged Morningstar EM Factor Tilt Index Fund represent additions to FlexShares already successful lineup of factor tilt ETFs, a roster that includes the FlexShares Morningstar Developed Markets ex-US Factor Tilt Index Fund (Flexshares Trust TLTD) and the FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (Flexshares Trust TLTE).

The FlexShares Currency Hedged Morningstar DM ex-US Factor Tilt Index Fund can be used as a strategic beta replacement for traditional capitalization-weighted international equity funds by investors looking for small-cap and value tilts.

At the country level, that new ETF is dominated by Japan and the UK, which combine for over 45 percent of the fund's weight. TLDH allocates over a quarter of its sector weight to financial services names, with industrials and consumer discretionary combining for another 30 percent, according to FlexShares data.

At a time when emerging markets' currencies are flailing against the dollar and a Federal Reserve rate hike could exacerbate that situation, the FlexShares Currency Hedged Morningstar EM Factor Tilt Index Fund could be particularly alluring for investors looking to wager on a rebound for developing world equities.

Like TLDH, TLEH features small-cap and value tilts. The currency hedged emerging markets ETF's country allocations are decidedly low beta, as China stocks listed in Hong Kong, South Korea and Taiwan combine for over half of the new ETF's country weight. Financials are over a quarter of TLEH's sector weights with industrials and consumer discretionary combining for another 28 percent.