Investors have been piling into currency-hedged equity tracker funds, seeking protection against big moves in foreign exchange rates.
Typically foreign investors buy un-hedged equities since share prices are usually negatively correlated to currencies. In fact, they offer a partial hedge against sharp moves in foreign exchange.
But with most equity markets near record highs and major currencies notching up double-digit gains or losses this year, investors are taking no chances.
Exchange-traded funds trade like stocks but track a wider range of securities more cheaply than buying the underlying assets. With a currency-hedged ETF, an investor pays an additional cost for hedging the foreign exchange risk, often using currency forwards or options.
"ETFs are becoming a tool also to manage currency," said Simone Rosti, European head of passive and exchange-traded fund sales at UBS.
Investors poured some $17 billion into currency-hedged equity ETFs globally to the end of July, a sharp turnaround from the $9.1 billion of outflows seen in the same period last year.
Currency-hedged ETFs are relative newcomers and still just a drop in the ocean. They make up just $127 billion of the $3.3 trillion assets under management in equity ETFs as a whole, according to industry group ETFGI.
But their growing importance underlines the impact currency moves can have on portfolio returns.
"The performance of an equity market relative to the global benchmark can be dominated by movements in the country's currency," said Mark Richards of JPMorgan Asset Management.
A U.S. investor holding an MSCI Europe tracker, for example, has enjoyed returns of 15.5 percent year-to-date in dollars, while the index has gained just 3.2 percent in euro terms.