MSCI launches daily hedged indices amid heightened exchange rate volatility

Jul 16th, 2013 | By | Category: ETF and Index News

MSCI, a leading provider of indices to exchange-traded funds (ETFs), has expanded its family of currency-hedged benchmarks with the launch of a series of new daily hedged indices.

MSCI launches daily hedged indices amid heightened exchange rate volatility

MSCI has rolled out new daily currency-hedged indices amid heightened exchange rate volatility.

The newly launched MSCI Daily Hedged Indices aim to represent the returns of an MSCI parent equity index with its currency risk hedged back to a single home country currency.

Currency movements can have a significant impact on the performance of global market indices – particularly during financial crises and in volatile times.

The new indices seek to reduce this impact by hedging each foreign currency in the index back to the home currency.

Commenting on the launch, Diana Tidd, Managing Director and Head of the MSCI Index Business in the Americas, said: “Daily hedged indices are used strategically by investors who may want to gain exposure to foreign equity markets, but who also want to mitigate the risk of currency fluctuations.”

The indices work by selling each foreign currency in the index forward at the TN (tomorrow next) forward rate each day. The amount of forwards sold across all currencies represented in the MSCI parent index represents the value (or the market capitalisation) of the MSCI parent index on the previous day and the currency profit and loss is assumed to be reinvested in the index with a one-day lag in order to improve index replicability.

The MSCI Daily Hedged Indices aim to track the parent index in local currency terms more closely than the existing MSCI Hedged Indices, which are hedged on a monthly basis; however, they incur the expense of more frequent hedging.

The launch of the new indices comes at a time when investors are attaching greater importance to currency hedging as a result of a sharp spike in exchange rate volatility. This volatility has been triggered, in part, by aggressive monetary policies from a number of major central banks, most glaringly the Bank of Japan.

In turn, this has led to increased demand for ETFs with inbuilt currency hedges. Among the most popular, in terms of inflows, has been WisdomTree’s  NYSE Arca-listed WisdomTree Japan Hedged Equity ETF (DXJ), which has surged from around $1 billion in assets at the turn of the year to more than $11 billion today.

Similarly, Deutsche Asset & Wealth Management, part of Deutsche Bank, has seen a jump in inflows into its currency-hedged ETF range, especially into its Japan and EAFE (Europe, Australasia and the Far East) products.

Demand for currency-hedging has also extended to fixed income. iShares, the world’s largest provider of ETFs, has been particularly active in this space, rolling out a number of currency-hedged corporate and emerging market bond ETFs in the UK in the past few months.

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