Why Currency-Hedged ETFs are Increasing in Popularity

Why Currency-Hedged ETFs are All the Rage

If you’re an exchange-traded fund (ETF) investor like me, then you are always looking for trends that can make you money.

One component of that search for the hottest ETF trends is to “follow the money.” Lately, when we do a check of money flows out of, and into, various ETF segments, we see a clear pattern emerge.

For example, the most recent data from May compiled by State Street Global Advisors, the company behind the Spiders, or SPDR ETFs, shows a distinct migration into international ETFs — more specifically, into currency-hedged ETFs.

According to State Street, “International exposure continues to be all the rage among equity investors with broad-based international funds taking in nearly $6.3 billion and currency-hedged ETFs raking in nearly $3.1 billion.”

So, why are currency-hedged ETFs all the rage?

The simple answer is… relative outperformance.

For example, Europe is an area that many investors are flocking to, and for good reason. The European Central Bank (ECB) has made it clear that it will keep the quantitative easing (QE) spigot turned on full blast for a lot longer. On top of that, economic data in Europe is improving. Then there is the weaker euro, which has been plagued by, among other things, the fiscal mess that is Greece.

These conditions are actually bullish for stocks in the iShares Europe 350 (IEV). That fund has lost some ground of late, but year to date, IEV shares are up 9.1%. That’s great, especially when compared to U.S. stocks, which are up just 2.7% so far in 2015.

Yet when you employ a currency hedge to European stocks the way an ETF such as the WisdomTree Europe Hedged Equity ETF (HEDJ) does, you get far better performance. Year to date, HEDJ is up 14.3%. That’s more than 57% better performance than simply investing in European stocks that do not have a currency hedge in place.

This situation is similar for Japan. If we look at the iShares Japan ETF (EWJ), we see a year-to-date performance of 14.4%. Now, there’s certainly nothing wrong with that — until you compare it with its currency-hedged counterpart.

The WisdomTree Japan Hedged Equity ETF (DXJ) is up 18% so far this year, a 25% better relative performance than the non-currency-hedged option.

The charts here of IEV vs. HEDJ, and EWJ vs. DXJ, clearly demonstrate why — in the era of global quantitative easing, where debasing your own currency inflates your equity markets and makes your exports cheaper around the globe — currency-hedged ETFs have become all the rage.

To find out more about how you can profit using currency-hedged ETFs, I invite you to check out my Successful ETF Investing newsletter, right now.

ETF Talk: Dividend Fund Provides Superb Income

Dividend-bearing investments can be found in a variety of places, and there are many choices. Of course, it seemed inevitable to me that an exchange-traded fund (ETF) provider sooner or later would pool together the best worldwide dividend-paying companies into a single fund.

Sure enough, one fund company did. The result is Global X SuperDividend ETF (SDIV), a product of Global X Funds that offers a global perspective on investing in the stocks of high-yielding companies.

This fund holds 199 securities from around the world, equally weighted and chosen for their high and sustainable payouts. SDIV generally pays a consistent dividend on a monthly basis throughout the year at a roughly equal rate, but it can offer occasional bonuses or fluctuations. For example, 2014’s end-of-year dividend was about 30% larger than a normal monthly payment — a nice Christmas bonus.

SDIV is able to provide a current yield of 5.93% using this technique, assuming no December surprise occurs this year. The fund has just over $1 billion in assets managed. Its recent performance has been somewhat weak in terms of capital depreciation.

Year to date, the fund’s value has been basically flat, losing 0.56%. Going back to September, SDIV has been down from its previously higher level, and it has been largely range-bound since then. This fund’s expense ratio is 0.58%.

Though its holdings are theoretically equally weighted, they are not always precisely balanced in practice. Its top 10 current holdings total 12.50% of its assets. The largest holdings are Evergrande Real Estate Group, 1.58%; First Bank of Nigeria, 1.41%; Surge Energy Inc, 1.32%; Veresen Incorporated, 1.21%; and Intermediate Capital Group, 1.21%.

In terms of sectors, the fund is most strongly allocated to real estate, 35.07%; financial services, 21.05%; and utilities, 10.25%. Its portfolio of countries includes the United States, Australia, Singapore, France, Finland and many others.

If you are looking to use an ETF to supercharge your income returns, Global X SuperDividend ETF (SDIV) might be exactly what you’re seeking.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful ETF Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.

Have You Graduated from ETFU.com?

Graduation time is here, and while your son or daughter might be celebrating his or her completion of university, have you done the same with ETF University?

The recent rollout of the ETF University website, or ETFU.com, has been a big success. If you have visited our newest education-oriented site devoted to all things exchange-traded funds, then I just want to say — thanks!

If you haven’t yet had a chance to visit ETFU.com, then now you have even more reason to give a look, as we have just upgraded the content at the site to feature our new, comprehensive ETFU.com Database.

This database is designed to give you all the information you need — and then some — about any ETF. What kind of information am I talking about? Well, to start with, you get all of the key vital statistics on any fund you select. These statistics include a basic description of the fund and which index it’s based on, along with the fund’s primary objective.

Then you get basic vitals such as current price, percentage change from the prior day’s close, trading volume, assets under management, expense ratio and the average daily trading volume during the past 100 days. You also get historical performance data (in percentage terms) for one week, one month, 100 days, year to date and one year.

Yet perhaps the best features, and certainly my personal favorites, when it comes to the content on the new ETFU.com Database are the Portfolio Stats, Technicals and, of course, the large price chart. In just a glance of these sections, I can get near-instant data on key metrics such as yield, price/earnings (P/E) ratio, percentage the current price is from its 50- and 200-day moving averages and where it stands in relation to its 52-week high.

Knowing how to research this material will help make you an expert in ETFs — and who knows, you might even be awarded the next ETF University professorship!

Spreading Disease

“When one gets in bed with government, one must expect the diseases it spreads.”

— Ron Paul

You can always count on the libertarian-leaning former Representative from Texas to put it bluntly when it comes to government. Here, former Congressman Paul indicts government as a disease carrier — and anyone foolish enough to do business with it as being susceptible to illness.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Weekly ETF Report readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week on Eagle Daily Investor about China’s delay, the flat S&P and climbing yields. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.

Have a great weekend,

Doug Fabian

Upcoming Appearance

I will be attending the San Francisco MoneyShow, July 16-18, at the Marriott Marquis. To register, click here. Mention priority code 038970.