Turning Fortunes
While the cost of hedging foreign equity exposure can be substantial even for relatively low-cost ETFs, amounting to anything between 1 to 2 percent, investors say these products can offer valuable savings especially when markets lean towards consensus views.
For example, at the end of last year, expectations that U.S. President Donald Trump’s fiscal plans would fuel a strong dollar and prompt the Federal Reserve to raise interest rates multiple times were very popular.
But those expectations have been squashed in recent months and bets the greenback will weaken have multiplied.
Inflows into currency-hedged ETFs exposed to the United States also ballooned this year, drawing in $5.9 billion so far – already ahead of the $5.3 billion net inflows for the full year 2016.
"Is this really the time, now that the dollar has moved, that you want to go unhedged? I'd really question that," said Jeremy Schwartz, director of research at WisdomTree Asset Management, adding U.S. investors should consider protecting against a potential rise in the dollar.
Double Hedging
But some remain skeptical about the need for ETFs to hedge currency exposure when large multinational companies run sophisticated treasury operations that use a variety of instruments to protect themselves against currency swings.
"Buying a hedged ETF hedges the currency exposure of companies that are already hedging," wrote Vincent Deluard, head of global macro strategy at INTL FCStone, a brokerage, in a note to clients.
"Double-hedging achieves nothing other than generate extra fees and commissions."