BlackRock and WisdomTree plan ‘flexible’ currency-hedged ETFs

Nov 20th, 2015 | By | Category: Equities

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BlackRock, the asset manager behind the iShares range of exchange-traded funds, and WisdomTree, a leading provider of currency-hedged ETFs, have announced separate plans to launch a range of ETFs that use adjustable currency-hedging techniques. The firms have outlined their plans in documents filed with the US Securities and Exchange Commission to develop funds that expand or contract the level of currency hedging depending on a rules-based methodology that examines the dynamics of the currency in question.

BlackRock and WisdomTree plan 'flexible' currency-hedged ETFs

The proposed new funds will employ full, partial, or no currency-hedging depending on signals such as carry, value, momentum and volatility.

The extent to which the new funds will employ currency hedging depends upon calculations of the reference currency’s carry, value, momentum, and volatility. Depending on these factors, the fund may assume a zero percent, 25 percent, 50 percent or 100 percent currency hedge.

Due to the volatile nature of currencies, previous ETFs (those unhedged and those 100% hedged) have often been used as a form of tactical positioning depending on the investor’s opinion on the direction of currency movements. The newly announced suite of funds may better serve those investors who do not hold a particular view on upcoming exchange rate moves, and would rather adopt a rules-based approach to currency-hedging within the one-ticket wrapper of a single ETF.

US investors may be particularly interested in the new strategy given the recent rally in the dollar to highs not seen in over a decade. Those investors who held internationally-based ETFs during this time would have seen a significant reduction in their overall returns due to currency effects, prompting a renewal of ideas on how to better manage currency risk. Although yet to be tested, the new funds could provide enhanced returns through enabling the hedging function when the US dollar trends upwards, thus mitigating the effects of converting foreign income and capital appreciation at a less favourable exchange rate, but also reducing or eliminating the hedge during times when foreign currencies are strengthening.

BlackRock has initially planned to launch three funds using flexible currency hedging. These ETFs will track MSCI equity indices focused on the eurozone, Japan, and the developed markets.

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