With such high levels of volatility in emerging markets, and an increasingly strong U.S. dollar, hedged ETF investing has definitely come into vogue as of late. And this trend could definitely remain in place if the current rocky environment that investors are seeing in the emerging market world continues as we head further into the year.
After all, when the dollar is strengthening, a hedged investment can outperform an unhedged one, making currency-hedged picks good ideas for investors who believe in either weak foreign currencies or a strong dollar (see the Key to International ETF Investing).
While there are still relatively few options out there that give investors access to currency-hedged markets, Deutsche Bank just launched a few more funds in this segment that look to round out the offering for investors.
For investors intrigued by this approach to investing in foreign markets, we have highlighted some of the key details from these new products—and their competitors-- below:
db X-trackers MSCI Mexico Hedged Equity Fund: DBMX
This product follows the MSCI Mexico IMI 25/50 US Dollar Hedged Index. This benchmark looks to provide access to Mexican equities, while at the same time mitigating the impact of the changes in value of the peso against the dollar. The product costs a pretty low 50 basis points a year in fees, putting it in line with its unhedged counterpart (read Best ETF Strategies for 2014).
In terms of the portfolio, America Movil dominates at nearly 20% of the total, though it should be noted that the fund holds about 50 securities for its basket. In terms of sectors, consumer staples take the top spot at just over 22%, though telecom and financials both receive over 18% as well.
Competition: There isn’t much in terms of other Mexican ETFs, though the iShares MSCI Mexico Investable Market Index Fund (EWW - ETF report) is quite popular. This product has over $2.5 billion in assets and average daily volume in the millions, so it will be hard to unseat this fund from its top perch.
db X-trackers MSCI South Korea Hedged Equity Fund: DBKO
This new fund looks to track the MSCI Korea 25/50 US Dollar Hedged Index. This benchmark provides exposure to South Korean equities, while also mitigating the influence of the South Korean won’s movements against the dollar. The fund costs 58 basis points a year, making it slightly cheaper than the ‘regular’ South Korean ETF on the market.
The fund’s portfolio consists of about 100 stocks in total, and is dominated by Samsung Electronics which accounts for roughly one-fifth of the fund’s assets. For sectors, technology takes the top spot at just over 31%, followed by consumer discretionary (18.3%), and financials (15.2%).
Competition: Easily the most popular is the iShares MSCI South Korea Index Fund (EWY - ETF report) which has over $4 billion in assets, and average daily volume of over 2.7 million shares. However, there is also a hedged name in this space, the WisdomTree Korea Hedged Equity Fund (DXKW - ETF report) , so this could be a crowded market for Deutsche Bank (see Inside the New Hedged Korea ETF).
db X-trackers MSCI All World ex US Hedged Equity Fund: DBAW
For more of a global play, consider this fund which follows the MSCI ACWI ex USA US Dollar Hedged Index. This benchmark gives broad exposure to dozens of nations across the emerging market and developed world, while simultaneously eliminating some of the currency risks from these nations.
The fund is a cheap choice, charging just 40 basis points a year, while the index contains more than 1,800 constituents. Exposure is tilted towards financials (26.8%), while industrials and consumer discretionary each receive more than 10% as well. Nationally, the fund is focused on Europe but others receive a large role with the top five nations being the UK, Japan, France, Canada, and Germany.
Competition: There is an iShares MSCI ACWI ex US Index Fund (ACWX - ETF report) which looks to be a fierce competitor for DBAW. Not only is this unhedged fund cheaper at 34 basis points a year, but it has more than $1.5 billion in assets, and volume exceeding half a million shares a day (See all the World ETFs here).
Currency hedging generally costs a bit more than ‘regular’ funds, but if local currencies are sliding, it can be well worth it for investors. When currencies are falling against the dollar, hedged products can easily outperform, and we have seen this in the Japanese market over the past 18 months.
However, in markets of stable or rising currency prices, hedged products may underperform their more traditional counterparts, while bid ask spreads may also create higher trading costs, at least in the beginning if investors do not pile into these funds. Due to these factors, these ETFs may be solid options for some, but you should definitely have a strong opinion on the underlying currencies involved before participating in these products.
If we do see a strong dollar though, these funds seem likely to outperform, though only time will tell if investors embrace these currency hedged products, or if they just stick to hedged products tracking nations that are experiencing big currency moves, like Japan, instead.
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