Jerome Powell and his team at the Federal Reserve have raised the benchmark borrowing cost to 5.25%-5.50%. While a 2.6% rise in inflation, down from a 4.1% rise in Q1 and well below the estimate for a gain of 3.2%, and an annualized increase of 2.4% in the gross domestic product in the second quarter, topping the 2% estimate, had raised hopes that the elusive “soft landing” could be within reach, recent developments have been less than encouraging.
As the Federal Reserve Bank of Kansas City’s annual gathering in Jackson Hole, Wyoming, gets underway, with a more-than-forecasted wage increase, there are increasing concerns that interest rates could stay higher for longer.
While a hawkish stance usually lends strength to the dollar, Fitch Ratings’ recent downgrade of the U.S. long-term rating to AA+ from AAA, citing the erosion of confidence in fiscal management, has weakened the global reserve currency.
Moreover, the slump in their market value and a consequent increase in their yields due to a selloff of long-duration fixed-income instruments, which led to Moody’s cutting ratings of 10 U.S. banks and putting some big names on downgrade watch, has not helped matters either.
With a material risk that an apparently resilient economy could find itself regressing into an economic slowdown, it is understandable why seasoned investors could look at international equities for diversification opportunities to manage tail risks.
However, the pandemic, armed conflict in Ukraine, shifting geopolitical inclinations in the Middle East, the recent expansion of the BRICS bloc of developing nations accompanied by calls to reduce reliance on the U.S. dollar, and the Bank of Japan’s policy tweak of loosening its yield curve are all indicating to a changing world order.
Hence, returns from international investments are as much a function of wild swings in currency exchange rates as they are of the performance of the securities of underlying businesses. To help investors reduce risk exposure to unfavorable impacts of the former, many currency-hedged mutual funds and ETFs focus on providing long (buy) and short (sell) exposures to many currencies.
In view of the above, these five exchange-traded funds could be worthy of consideration:
Xtrackers MSCI EAFE Hedged Equity ETF (DBEF)
DBEF is an exchange-traded fund launched and managed by DBX Advisors LLC. It offers currency-hedged exposure to developed equity markets outside the U.S., making it a suitable fixture in long-term buy-and-hold portfolios. DBEF uses short-term forward contracts to neutralize the impact of exchange rate fluctuations, thereby rendering the performance of the underlying stocks the sole driver of returns.
With $4.14 billion in AUM, DBEF’s top holding is Nestle S.A. (NSRGY), which has a 2.04% weighting in the fund. It is followed by ASML Holding NV (ASML) at 1.72% and Novo Nordisk A/S (NVO) at 1.65%. The highly diversified fund has 1,000 holdings, with only 18.97% of its assets concentrated in the top 10 holdings.
DBEF has an expense ratio of 0.35%, lower than the category average of 0.46%. It currently pays $6.22 annually as dividends, and its payouts have grown at a 55.7% CAGR over the past five years. It saw a net inflow of $21.22 million over the past month and $255.64 million over the past three months. The ETF has a beta of 0.71.
iShares Currency Hedged MSCI EAFE ETF (HEFA)
As the name suggests, HEFA is a currency-hedged exchange-traded fund that is managed by BlackRock Fund Advisors. The fund invests in public equity markets globally, excluding the U.S./Canada region, through derivatives and through other funds in value stocks of companies operating across diversified sectors.
Almost all of HEFA’s $3.46 billion in AUM is allocated to iShares MSCI EAFE ETF (EFA), which has a 99.95% weighting in the fund, with USD comprising the remaining assets of HEFA.
EFA’s top holding is Nestle S.A. (NSRGY), which has a 2.13% weighting in the fund, followed by ASML Holding NV (ASML) at 1.76% and Novo Nordisk A/S (NVO) at 1.68%. The highly diversified constituent fund has 1000 holdings, with only 17.08% of its assets concentrated in the top 10 holdings.
HEFA has an expense ratio of 0.35%, which is lower than the category average of 0.40%. It currently pays $6.56 annually as dividends, and its payouts have grown at a 49.1% CAGR over the past five years. It saw a net inflow of $74.06 million over the past month and $176.04 million over the past three months. The ETF has a beta of 0.7.
WisdomTree Japan Hedged Equity Fund ETF (DXJ)
DXJ is an exchange-traded fund co-managed by Mellon Investments Corporation and WisdomTree Asset Management, Inc. The fund offers broad-based exposure to the Japanese equity market while hedging out the effects of currency fluctuation. Hence, it is best suited for investors who are bullish on Japanese stocks but bearish on JPY’s value vis-à-vis that of USD.
With $2.72 billion in AUM, DXJ’s top holding is Toyota Motor Corp. (TM), which has a 4.86% weighting in the fund, followed by Mitsubishi UFJ Financial Group, Inc. (MUFG) at 4.37%, and Mitsubishi Corporation (MSBHF) at 3.64%. The well-diversified fund has 435 holdings, with only 30.7% of its assets concentrated in the top 10 holdings.
DXJ has an expense ratio of 0.48%, which enables investors to benefit from hedging while incurring costs lower than what could be managed while doing it on their own. It currently pays $2.60 annually as dividends, and its payouts have grown at a 9.8% CAGR over the past five years.
DXJ’s net inflow came in at $23.56 million over the past month and $731.28 million over the past three months. It has a beta of 0.65.
WisdomTree Europe Hedged Equity Fund ETF (HEDJ)
HDJ is an exchange-traded fund co-managed by Mellon Investments Corporation and WisdomTree Asset Management, Inc. The fund offers broad-based exposure to the European equity market while hedging out the effects of currency fluctuation.
Hence, it is best suited for investors who are bullish on European stocks but wish to insulate themselves from the impact of fluctuation of the exchange rate of EUR with respect to USD.
With $1.40 billion in AUM, HEDJ’s top holding is Stellantis N.V. (STLA), which has a 6.91% weighting in the fund. It is followed by ASML Holding NV (ASML) at 4.41% and Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) at 4.37%. The fund has 127 holdings, with 41.83% of its assets concentrated in the top 10 holdings.
HEDJ has an expense ratio of 0.58% and currently pays $1.58 annually as dividends. The fund’s payouts have grown at a 9.8% CAGR over the past five years. DXJ’s net inflow came in at $28.25 million over the past three months. It has a beta of 0.88.
iShares Currency Hedged MSCI Japan ETF (HEWJ)
As the name suggests, HEWJ is a currency-hedged exchange-traded fund that is managed by BlackRock Fund Advisors. The fund invests in the public equity markets of Japan through derivatives and through other funds in value stocks of companies operating across diversified sectors. Hence, it is best suited for investors who are bullish on Japanese stocks but bearish on JPY’s value vis-à-vis that of USD.
Almost all of HEWJ’s $213.9 million in AUM is allocated to iShares MSCI Japan ETF (EWJ), which has a 99.95% weighting in the fund, with USD comprising the remaining assets of HEWJ.
EWJ’s top holding is Toyota Motor Corp. (TM), which has a 5.16% weighting in the fund, followed by Sony Group Corporation (SONY) at 3.05% and Mitsubishi UFJ Financial Group, Inc. (MUFG) at 2.59%. The well-diversified fund has 238 holdings, with 23.5% of its assets concentrated in the top 10 holdings.
HEWJ has an expense ratio of 0.50%. It currently pays $12.31 annually as dividends, and its payouts have grown at a 92.3% CAGR over the past five years. HEWJ’s net inflow came in at $45.01 million over the past month and $61.84 million over the past three months. It has a beta of 0.63.
