Have Your Cake And Eat It, Too With Currency Hedged Dividend ETFs

One thing issuers of exchange traded funds are particularly adept at is milking a hot a theme. That is certainly true of currency hedged funds, which are among this year's top asset-gathering ETFs.

Consider this: In a single day earlier this year, BlackRock Inc.'s BLK iShares unit, the world's largest issuer of ETFs, launched 11 currency hedged products. On Aug. 12 and Aug. 19, Deutsche Asset & Wealth Management (Deutsche AWM) launched a combined 10 currency hedged ETFs. 

Deutsche AWM's Aug. 12 launches were comprised of a quartet of dividend ETFs with currency hedged kickers. Those new funds are the Deutsche X-trackers ACWI ex-U.S. High Dividend Yield Hedged Equity ETF HDAW, Deutsche X-trackers Emerging Markets High Dividend Yield Hedged Equity ETF HDEE, Deutsche X-trackers EAFE High Dividend Yield Hedged Equity ETF HDEF and the Deutsche X-trackers Eurozone High Dividend Yield Hedged Equity ETF HDEZ.

The marriage of dividends and currency hedging via ETFs, particularly developed market funds, makes sense. Especially at a time when equity markets in several major developed markets, including Australia, Germany and Japan, sport higher dividend yields than the yields on those countries' benchmark government bonds.

“Given the importance these products attach to dividends, it’s worth quickly recapping two related theories from corporate finance: Dividend Irrelevance and Dividend Signaling. The theory of Dividend Irrelevance would level two charges at a highdividend strategy; that investors can simply recreate their own dividends by selling stock and that dividend policy cannot impact a firm’s value,”' said Deutsche AWM in a research piece out Thursday. “We believe these concerns are not valid here for two reasons. First, because the theory assumes zero transaction costs, which is unrealistic; it is unlikely that investors would want to go to the trouble and expense of selling down their holdings on a quarterly basis to recreate dividend yields. Second, the assertion that dividend policy doesn’t affect a firm’s valuation has been challenged by more recent evidence that higher-yielding stocks might actually outperform the market over the long run.” 

The Deutsche X-trackers ACWI ex-U.S. High Dividend Yield Hedged Equity ETF tracks the MSCI ACWI ex USA High Dividend Yield US Dollar Hedged Index, the currency hedged equivalent of the widely followed MSCI ACWI ex USA Index.

The new ETF holds nearly 230 stocks, a third of which are financial services names, according to issuer data. Over a third of HDAW's geographic weight is allocated to the UK, an important trait because after the US, the UK is the second-largest developed markets dividend market and one of a small number of markets that has, in recent years, offered dividend growth on par with the US.

As Deutsche AWM notes, it is important for U.S. investors to remember that ex-U.S. developed market indexes often sport higher dividend yields than U.S. equivalents.

“The dividend yields of the S&P 500 Index (U.S.), FTSE 100 Index (United Kingdom) and DAX (Germany) over the last fifteen years or so, averaging 1.9%, 3.6% and 2.9%, respectively. Not only are dividend yields currently higher abroad, but this trend has also been very consistent over time. For an investor motivated by an absolute level of income, accessing these higher levels via an international perspective could be attractive,” said Deutsche AWM.

The Deutsche X-trackers EAFE High Dividend Yield Hedged Equity ETF is the currency hedged dividend answer to the MSCI EAFE Index, perhaps the most widely followed developed markets benchmark. The Deutsche X-trackers EAFE High Dividend Yield Hedged Equity ETF is truly dominated by British stocks with an over 40 percent to the UK, France and Australia, another potent developed market dividend grower, are the other countries with double-digit allocations in the new ETF.

Deutsche AWM knows what it is doing when it comes to alternatives to the standard MSCI EAFE Index. After all, the Deutsche X-trackers MSCI EAFE Hedged Equity ETF DBEF is now a $13.5 billion ETF, making it one of the largest EAFE ETFs in the world. 

“Currency hedging has the possibility to reduce volatility—a potentially attractive prospect for income-oriented investors who rely on investments to meet present liabilities. Over the long run, hedging currency exposure or leaving investments unhedged does not typically have a significant impact on returns, though currency fluctuations can significantly reduce or add to returns over short periods of time,” adds Deutsche AWM.