Why Currency-Hedged ETFs are All the Rage

By Jim Woods

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.

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