The U.S. stock market has hit multiple highs on several occasions this year, but the real encouragement has come from international investing even amid a strong dollar. This is because a number of countries across the world have chosen loose monetary policies by cutting interest rates or other actions to stimulate sagging growth and prevent deflationary pressures in their economies.
This is in stark contrast to the U.S. Fed policy of tightening its stimulus program by wrapping up QE3 and aiming an interest rate hike sometime later in the year. The diverging policies have pushed U.S. dollar higher and other currencies lower, intensifying the currency war.
While monetary easing makes international investment a compelling opportunity for U.S. investors, a strong dollar could wipe out the gains when repatriated in U.S. dollar terms, pushing international investment into the red even when the stocks performed well. As a result, investors flocked to the currency hedged ETFs in order to tap the bullish international fundamentals dodging the effects of a strong greenback (read:Â Top Ranked Currency Hedged ETFs in Focus on Dollar Surge).
This is especially true as the currency hedged funds look to strip out currency exposure to a foreign economy via the use of currency forwards or other instruments that bet against the non-dollar currency while at the same time offer exposure to foreign stocks. Given this, these products have seen solid inflows in the first quarter of this year, as per ETF.com.
The ultra-popular European fund – WisdomTree Europe Hedged Equity Index Fund ((HEDJ - ETF report)) – led the way gathering more than $10 billion in capital. This has boosted the fund’s asset base to over $16.8 billion. The ETF tracks the WisdomTree Europe Hedged Equity Index holding 122 securities with heavy concentration on the top 10 holdings at 45.8%.
However, it is pretty well spread across a number of sectors with consumer staples, consumer discretionary, industrials, health care and financials taking double-digit exposure. Among countries, Germany (26.5%), France (24.8%), Spain (17.3%) and the Netherlands (16.3%) dominate the holdings’ list. The fund charges 58 bps in annual fees and sees an average daily volume of about 3.5 million shares. It surged 18.6% in the first quarter of 2015 and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating (read: 3 European ETFs Seeing a Surge in Interest).
Another currency hedged fund – Deutsche X-trackers MSCI EAFE Hedged Equity ETF ((DBEF - ETF report)) – with an asset base of around $6.8 billion and average daily volume of more than 2.4 million shares, pulled in about $4.8 billion in capital in the first quarter. This fund targets the developed international stock market with no currency risk and tracks the MSCI EAFE US Dollar Hedged Index. In total, the product holds 916 securities in its basket with none holding more than 1.88% share.
However, it is skewed towards the financials sector, which makes up for one-fourth of the portfolio, while consumer discretionary, industrials, health care, and consumer staples round off the top five with double-digit exposure each. Among countries, Japan takes the top spot at 23%, closely followed by United Kingdom (17%) and Switzerland (10%). The fund charges 35 bps in fees per year from investors and has gained 11.6% so far this year. It has a Zacks ETF Rank of 2 or ‘Buy’ rating.
Japan ETF is also not behind as WisdomTree Japan Hedged Equity Fund ((DXJ - ETF report)) with a total asset base of around $15.9 billion, has accumulated over $2.6 billion in capital. The fund offers exposure to the Japanese stocks while at the same time provides a hedge against any fall in the Japanese yen. This is easily done by tracking the WisdomTree Japan Hedged Equity Index. Holding 324 stocks in its basket, the product is slightly concentrated on the top two firms – Toyota Motor and Mitsubishi – with 5.8% and 4.9% share, respectively. Other firms do not hold more than 3.96% of assets (read: Four Reasons to Buy WisdomTree ETFs).
Consumer discretionary and industrials take the top two spots with 24.9% and 20.8% share, respectively, while information technology and financials round off the top four. The fund trades in solid volume of about 6.4 million shares per day and charges 48 bps in annual fees. It has added 12.7% in the first quarter and has a Zacks ETF Rank of 1.
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