Currency Hedging Makes its way to Junk Bond ETFs

BlackRock BLK, the parent company of iShares, the world's largest issuer of exchange traded funds, today expanded its lineup of currency hedged and fixed income exchange traded funds with the introduction of one new ETF: The iShares Currency Hedged Global ex USD High Yield Bond ETF HHYX.

For the year ended June 2015, investors allocated $48 billion to various currency hedged funds, but those inflows have accelerated in significant fashion this year with the WisdomTree Japan Hedged Equity ETF DXJ and the Deutsche X-trackers MSCI EAFE Hedged Equity ETF DBEF combining for year-to-date inflows of more than $25 billion. 

The iShares Currency Hedged Global ex USD High Yield Bond ETF is the first currency hedged bond ETF from iShares. The new ETF “seeks to track the investment results of an index composed of euro, British pound sterling and Canadian dollar denominated, high yield corporate bonds while mitigating exposure to fluctuations between the value of the component currencies and the U.S. Dollar,” according to iShares. 

Like many of the iShares fixed income ETFs that employ hedging mechanisms, the iShares Currency Hedged Global ex USD High Yield Bond ETF uses another iShares ETF as its primary holding, in this case it is the iShares Global ex USD High Yield Corporate Bond ETF HYXU, along with hedging tools, including currency forwards.

“We have seen significant U.S. dollar strength driven by global central bank policy divergence, and this could continue to impact U.S. dollar returns on international investments. Given this backdrop, we are pleased to now be able to provide U.S. investors with the flexibility to hedge some or all of the currency exposure of an international high yield bond investment with our iShares fixed income ETF suite,” said iShares Head of Fixed Income Investment Strategy Matt Tucker in a statement.

Italian bonds account for 22.2 percent of HHYX's weight while U.K. issues place second on the new ETF's roster with a weight of 15.1 percent. Germany at 14.7 percent and France at 12.6 percent are the other countries commanding double-digit allocations in the new ETF.

HHYX, which carries an annual expense ratio of 0.43 percent, has an effective duration of almost 3.7 years, according to issuer data.

While HHYX is a high-yield bond fund, the ETF eschews the riskiest junk-rated debt with bonds rated BB or B combining for almost 94 percent of the fund's weight.