Investors have definitely taken an interest in Japanese ETFs so far this year, and for good reason. The country has seen its market surge thanks to incredible easing policies, leading many to feel more optimistic about investing in the nation.
However, not all Japan ETFs are created equal, and investors have definitely seen some funds outperform. By and large, ETFs that employ currency hedging strategies—which eliminate the influence of the yen—have outperformed their unhedged peers over the past few months (read DXJ vs. DBJP: Which is the Better Hedged Japan ETF?).
That is because one of the main consequences of the easing in Japan has been a weakened currency. While this has helped out the exporters and stock prices, it has decidedly hurt investors who have repatriated foreign assets into dollars.
Looking to Europe
Given how much some funds can outperform when a currency is sliding, investors may be looking for a way to utilize this technique in other key markets. One nation that seems well poised to take advantage of a sliding currency is the European powerhouse of Germany.
The country relies on its industrial economy and exports to power growth, though worries have crept up about the nation and the common currency thanks to broad fears about Europe. This has made investors search for currency hedged plays on Germany too, which is probably part of the reason for why Deutsche Bank has just launched a new product to give investors targeted exposure to this very strategy.
New ETF: db X-trackers MSCI Germany Hedged Equity Fund- DBGR
This new fund looks to follow the MSCI Germany US Dollar Hedged Index, which looks to provide exposure to German equity markets, while at the same time mitigating exposure to fluctuations between the value of the American dollar and Germany’s currency, the euro (read Avoid These 3 Eurozone ETFs This Summer).
In terms of holdings, it appears as though Deutsche Bank was a little slow in migrating the new data over, so little is available at time of writing. That is due in part to the fund basically being a rebranding of the firm’s relatively unpopular Canada hedged product which never really caught on with investors.
The new fund though, does look to follow a similar index to the ultra popular iShares MSCI Germany Index Fund (EWG - ETF report), just with the addition of the hedging strategy. This product—which has over $3 billion in assets and average daily volume north of 3.5 million shares—holds about 50 stocks in its basket, charging 51 basis points a year in fees.
In terms of exposure, the fund is quite diversified, with consumer cyclical stocks, financials, and basic materials taking the top three spots. Industrials and health care aren’t too far behind to round out the top five, suggesting that EWG is quite spread out.
Can a hedged fund succeed for Germany?
One has to think that given the success of Japan hedged ETFs above their unhedged peers that there could be some interest in this strategy for the German market as well. This could be especially true if the ECB continues to ease and concerns grow about the strength of the euro.
Still, the hedged approach hasn’t exactly been much help for German investments over the last year, as the currency has actually appreciated against the dollar, as represented by (FXE - ETF report). Plus, German stocks have been on a tear too, so we would have to see a bit of a reversal in order to justify a hedged German product for some investors (see 3 Developed Market ETFs Crushing American Stocks).
Even with this positive currency impact, it is important to note that the launch of this new fund does beat out WisdomTree which had recently filed for a similar fund targeting Germany. So at least for this key European market, Deutsche Bank will have the first mover advantage over its arch-rival in the hedged ETF market (also see WisdomTree Files for Another Hedged Equity ETF).
As we have seen in the battle between (DXJ - ETF report) and (DBJP - ETF report), this first mover advantage can be key, as literally billions of dollars in assets separates these two products, despite DBJP’s relative outperformance over the past few months.
Obviously Deutsche Bank is looking for a reversal of these trends in the German hedged ETF market, though the euro will need to turnaround for interest to be there in the currency hedged space. Either way, at least investors will now have a currency hedged way to target the German market, allowing those who are bearish on the euro an easy way to target Europe’s most important economy without currency risks.
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Author is long EWG.