John Forlines III, founder and chairman of JAForlines Global, says that a year ago most of his international ETF positions were hedged; now it’s almost a 50-50 split. For new investors, the decision to hedge “depends on the region more than anything else.”
He believes that current economic conditions and monetary policy in Europe are likely to lead to the further deterioration of the euro against the dollar over the next couple of years. “Europe is in the early stages of quantitative easing and is dealing with a mini-crisis in Greece,” he says. “Under such conditions, there is a good case to be made for initiating hedged exposure in developed Europe.” On the other hand, he believes that “the yen-dollar relationship is more likely to be range-bound for a while.” And he isn’t crazy about currency hedged ETFs based on very broad indexes such as the MSCI EAFE.
“Countries have different monetary policies, and currencies don’t move in lockstep,” he says. “It makes more sense to target your exposure.”
Top Ten Currency Hedged ETFs By Assets
WisdomTree Europe (HEDJ)
Assets: $20.2 billion Expense Ratio: 0.58%
Launched in 2009, this massive ETF tracks an index of developed European dividend-paying stocks and screens for companies that get at least half their sales from exports outside the euro zone. Firms in France, Germany, Spain, the Netherlands and Belgium account for more than 90% of the portfolio, and the U.K. is excluded.
WisdomTree Japan (DXJ)
Assets: $18.3 billion Expense Ratio: 0.48%
This offering tracks a dividend-weighted index of Japanese stocks. Like other ETFs in the group, it has benefited from the falling yen and positive stock market reaction to Prime Minister Shinzo Abe’s fiscal policies. It’s been trading since 1996, and is by far the largest and most established currency-hedged ETF that focuses on Japan. Because it eliminates companies that get more than 80% of their revenue from domestic sources, it is underweight in financials relative to other Japan indexes.
iShares MSCI EAFE (HEFA)
Assets: $2.94 billion Expense ratio: 0.39%
While most assets in the group are attributable to either Europe or Japan, this iShares offering, launched in 2014, takes a broader view by offering exposure to a broad swath of developed nations. Japan and the U.K. represent 22% and 21% of the index, respectively, so the returns of this ETF depend heavily on the stock markets in those two countries.
Deutsch X-trackers MSCI Europe (DBEU)
Assets: $2.62 billion Expense ratio: 0.45%
This ETF follows the popular MSCI Europe Index. Unlike WisdomTree’s hedged European offering, which doesn’t have U.K. exposure, this one has nearly one-third of its assets there. Other hefty country weightings include Switzerland, France and Germany.
iShares MSCI Germany (HEWG)
Assets: $1.7 billion Expense ratio: 0.53%
Introduced in 2014, this relative newcomer tracks an index of mid- and large-cap German stocks. It is the largest and most liquid of three currency-hedge ETFs that focus on Germany, where a falling euro has benefited the country’s export-driven companies. Major holdings include Bayer AG, Daimler AG, BASF SE and Siemens, and the top 10 stocks account for nearly 60% of the underlying index.
iShares MSCI Eurozone (HEZU)
Assets: $1.46 billion Expense Ratio: 0.51%
The index this fund follows includes countries that use the euro as their official currency and excludes the U.K., Switzerland and Sweden, which make up over half of Europe’s market cap. France represents 32% of this ETF’s exposure, followed by Germany at 30% and Spain at 11%. Its largest holdings are Bayer AG, Sanofi, Total SA, Banco Santander SA and Anheuser-Busch InBev.
Deutsche X-tracers MSCI Japan (DBJP)
Assets: $1.34 billion Expense Ratio: 0.45%
Its expense ratio makes it the least expensive of the hedged Japan trackers, but it’s only slightly cheaper than its competitors. That advantage may be muted somewhat by wider-than-expected trading spreads, according to ETF.com.
iShares Currency Hedged MSCI Japan (HEWJ)
Assets: $781.4 million Expense Ratio: 0.48%
Trading costs here are likely to be minimal, since it is a currency-hedged version of the highly popular unhedged Japan ETF from iShares (EWJ). The unhedged ETF is used to create and redeem shares, which improves liquidity and narrows trading spreads.
WisdomTree Germany (DXGE)
Assets: $ 342 million Expense Ratio: 0.48%
Like WisdomTree’s Japan offering, DXGE screens out companies that obtain more than 80% of their revenues from domestic sources and weights constituents based on dividends. Like the HEWG fund, this one concentrates heavily on its top 10 holdings, which account for 53% of the underlying index.
Deutsche MSCI X-trackers MSCI Emerging Markets (DBEM)
Assets: $238.5 million Expense Ratio: 0.65%
While emerging market ETFs such as the iShares MSCI Emerging Markets fund (EEM) and the Vanguard FTSE Emerging Markets fund (VWO) have caught on among investors, this currency-hedged emerging market ETF has yet to gain a substantial following. Its index includes 23 countries and is dominated by China, Korea and Taiwan.