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11 Most Popular Currency-Hedged ETFs
Currency hedging strategies have been in vogue since the start of this year given the ultra-loose monetary policy across the globe in stark contrast to the U.S. Fed policy of tightening its stimulus program. The popularity saw a rise last month when the Fed hinted at a modest hike in interest rates in December. The diverging policies have been pushing the U.S. dollar higher and other currencies lower. While monetary easing is making international investment a compelling opportunity in the U.S., a strong dollar could wipe out gains when repatriated in U.S. dollar terms, pushing international investment into the red even when international stocks performed well. As a result, investors flocked to currency-hedged ETFs to tap bullish international fundamentals, dodging the effects of a strong greenback. This is especially true as the currency-hedged funds look to strip out currency exposure to a foreign economy via the use of currency forwards or other instruments that bet against the non-dollar currency, while at the same time, offering exposure to foreign stocks. Given this, we have highlighted 11 currency-hedged ETFs for investors that are extremely popular in the market: WisdomTree Europe Hedged Equity ETF (NYSEARCA: HEDJ ) The ETF tracks the WisdomTree Europe Hedged Equity Index holding 129 securities with moderate concentration on the top 10 holdings at 25.5%. It is pretty well spread across a number of sectors, with consumer staples, industrials, consumer discretionary, healthcare and financials taking double-digit exposure each. Among countries, Germany (25.9%), France (24.3%), the Netherlands (17.2%) and Spain (16.4%) dominate the holdings list. The fund has AUM of $21.3 billion, and sees an average daily volume of about 4.9 million shares. It charges 58 bps in annual fees and gained 13.5% in the year-to-date time frame. The product has a Zacks ETF Rank of 3 or a “Hold” rating with a Medium risk outlook. WisdomTree Japan Hedged Equity ETF (NYSEARCA: DXJ ) With AUM of $17.1 billion, this ETF targets the Japanese equity stock market without the currency risk by tracking the WisdomTree Japan Hedged Equity Index. Holding 314 stocks in its basket, the product is moderately concentrated across securities, with none holding more than 4.84% share. Consumer discretionary and industrials take the top two spots with 24.6% and 23.2% share, respectively, while information technology and financials round off the top four. The fund trades in solid volume of more than 6 million shares per day, and charges 48 bps in annual fees. It has risen nearly 14% so far this year, and has a Zacks ETF Rank of 2 or a “Buy” rating with a Medium risk outlook. Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEARCA: DBEF ) This fund targets the developed international stock market with no currency risk, and tracks the MSCI EAFE US Dollar Hedged Index. In total, the product holds 920 securities in its basket, with none holding more than 1.95% share, and charges 35 bps in fees. It is skewed toward the financials sector, which makes up one-fourth of the portfolio, while consumer discretionary, industrials, consumer staples and healthcare round off the top five with double-digit exposure each. Among countries, Japan takes the top spot at 23%, closely followed by United Kingdom (17%), France (10%) and Switzerland (10%). With an asset base of around $13.9 billion and average daily volume of about 4 million shares, the fund has gained 7.5% so far this year and has a Zacks ETF Rank of 3 with a Medium risk outlook. Deutsche X-trackers MSCI Europe Hedged Equity ETF (NYSEARCA: DBEU ) This product is the second popular European play that follows the MSCI Europe US Dollar Hedged Index. It holds 445 securities in its basket, which are widely spread out across components, with each holding less than 3% of assets. United Kingdom takes the top spot at 27%, while France, Switzerland and Germany round off the next three spots. From a sector look, financials accounts for the largest share at 22.5%, closely followed by consumer staples (14.9%) and healthcare (13.7%). The fund has amassed $3.8 billion in its asset base and trades in solid volume of more than 1.3 million shares a day. It charges 45 bps in fees per year, and has returned about 8% so far this year. The fund has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares Currency Hedged MSCI EAFE ETF (NYSEARCA: HEFA ) This fund provides a broad foreign market play without currency risks. It focuses on the EAFE region – Europe, Australasia, Far East – for exposure, and follows the MSCI EAFE 100% Hedged to USD index. It is basically a holding of the iShares MSCI EAFE ETF (NYSEARCA: EFA ) with currency hedge tacked on. Financials dominates the fund’s return with one-fourth share, while consumer discretionary, industrials, consumer staples and healthcare also get double-digit allocation each. Top nations include Japan and United Kingdom, with double-digit exposure, while France, Switzerland and Germany round out the top five. The fund has AUM of $3.1 billion and average daily volume of roughly 1.4 million shares. It charges 35 bps in annual fees and has gained about 8% in the year-to-date time frame. HEFA has a Zacks ETF Rank of 3 with a Medium risk outlook. iShares Currency Hedged MSCI EMU ETF (NYSEARCA: HEZU ) This ETF is appropriate for investors looking invest in euro zone stocks. It follows the MSCI EMU 100% USD Hedged Index, and is a play on the popular unhedged fund iShares MSCI EMU ETF (NYSEARCA: EZU ) with a hedge to strip out the euro currency exposure. The fund holds 245 well-diversified securities in its basket, dominated by financials at 22.4% and followed by consumer discretionary (13.9%), industrials (12.7%) and consumer staples (11.1%). The ETF has amassed $1.9 billion in its asset base, and trades in solid volumes of more than 1.3 million shares a day. The fund charges 50 bps in annual fees from investors and has delivered impressive returns of nearly 14% so far this year. It has a Zacks ETF Rank of 3 with a Medium risk outlook. Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEARCA: DBJP ) This product tracks the MSCI Japan US Dollar Hedged Index, which provides exposure to the Japanese equity markets and hedges the Japanese yen to the U.S. dollar by selling Japanese yen forwards. The fund holds 319 securities in its basket, with the largest allocation going to Toyota Motor (NYSE: TM ), while other firms make up less than 3% of its assets. From a sector look, the ETF is well diversified, with consumer discretionary, financials, industrials and information technology accounting for double-digit allocation each. The fund has AUM of $1.9 billion and average daily volume of around 487,000 shares. Its expense ratio came in at 0.45%. The product is up about 14.8% so far this year, and has a Zacks ETF Rank of 2 with a Medium risk outlook. iShares Currency Hedged MSCI Germany ETF (NYSEARCA: HEWG ) This ETF targets the German equity market without the currency risk. It follows the MSCI Germany 100% Hedged to USD Index, and is basically a holding of the iShares MSCI Germany ETF (NYSEARCA: EWG ) with currency hedge tacked on. Consumer discretionary, financials, healthcare, materials and industrials are the top five sectors of the fund. The fund has accumulated $1.5 billion in AUM and charges 53 bps in annual fees. Volume is good, as it exchanges more than 1.2 million shares, on average, on a daily basis. It has added 11% this year, and has a Zacks ETF Rank of 2 with a Medium risk outlook. iShares Currency Hedged MSCI Japan ETF (NYSEARCA: HEWJ ) This is another currency-hedged option to play Japanese equity, and is a hedged version of the popular iShares MSCI Japan ETF (NYSEARCA: EWJ ). Holding 320 stocks in its basket, consumer discretionary takes the top spot at 21.3%, closely followed by financials and industrials. The ETF has AUM of $712 million and sees volume of more than 593,000 shares a day. The expense ratio came in at 0.48%. The fund has gained 14.5% so far in the year and has a Zacks ETF Rank of 2 with a Medium risk outlook. WisdomTree International Hedged Quality Dividend Growth ETF (NYSEARCA: IHDG ) This product provides exposure to the dividend-paying companies with growth characteristics in the developed world ex U.S. and Canada and hedge exposure to fluctuations in the U.S. dollar and foreign currencies. This can be easily done by tracking the WisdomTree International Hedged Quality Dividend Growth Index. In total, the fund holds 213 stocks in the basket, with consumer staples and consumer discretionary as the top two sectors. In terms of country profile, United Kingdom takes the top spot at 20.2%, while Japan and Switzerland round off the next two spots with 13.3% and 10.2% share, respectively. WisdomTree Germany Hedged Equity ETF (NASDAQ: DXGE ) This German ETF follows the WisdomTree Germany Hedged Equity Index, holding 75 securities in its basket. It has a slight tilt toward the consumer discretionary sector with 21.6% share, followed by double-digit exposures in financials, industrials, materials and healthcare. It has managed assets worth $305.4 million and trades in good volume of 202,000 shares a day, on average. The fund charges 48 bps in annual fees, and is up 11.4% so far this year. DXGE has a Zacks ETF Rank of 2 with a Medium risk outlook. Original Post
A Strategy To Defend Your Portfolio From Bear Markets
It is important to protect one’s portfolio from crashes like 2007-2009 where the major market indices lost more than 50%. Historically, markets have seen long 4-10 years runs of steady Bull market interspersed with shorter 1-2 year Bear markets. Most losses in a bear market come within a short span of few months. An investor playing good defense will look to time an early exit in a crash. When market is sufficiently oversold, short term bounce backs present further opportunity to make gains. An investor who remained invested during stock market crash from October 2007 to February 2009 lost more than 50% of his investment (based on SPY performance ) during that period. Similarly, between September 2000 and September 2002, fully invested investors lost ~40% ( using SPY as a benchmark ). Both bear markets wiped out 3-5 years of preceding year gains. While timing the market is a hard proposition, it is incredibly important to preserve your portfolio from a major whitewash during a crash. “Defense wins Championships” is a famous saying in football but is more aptly relevant for investors that can successfully maneuver through a bear market. NFL teams with good defense minimize points scored against them by opposition; a good portfolio needs strong defensive strategies to protect from bear market onslaught. Further just like strong defense can actually add to score by triggering turnovers, bear market presents opportunities for sizeable gains which if not exploited means missed opportunity cost. For example, investors who were too risk averse and did not participate in the post-crash rally of 2009-2011, lost out on capital appreciation opportunity of 80-90% within that 2-year period. To build a good defensive strategy, an investor needs to understand the market dynamics. The picture below best illustrates the US stock market history of bull-bear markets ( Source: Business Insider ). (click to enlarge) Key takeaways we can derive from the above picture are: The large part of this graph is dominated by long running bull markets, with most runs lasting many years or even more than a decade. During this multi-year period, the market sees steady returns with small intermittent corrections interspersed. Some examples include the bull market in 1990s, 1980s, 1950s and 1940s, all of them lasted 10+ years. Bear markets are relatively short in terms of overall duration (1-2 years), and the losses come at a much faster rate (compared to gains in bull market). For example, 2008 crash lasted 1.3 years and 2002 crash lasted 2.1 years. The longest bear market was in the 1930s and lasted close to 3 years. “Market goes up in an escalator but down in an elevator” is a famous stock market quote that can summarize the overall dynamics. Understanding the wisdom behind these select few words is important for all investors. The picture below shows 1 example of Bull-Bear cycle in SPY adjusted close graph during the 2003-2008 period ( Source: Yahoo Finance data ). Notice the steady increase in SPY for 4+ years (escalator) followed by a dramatic 1-year crash in 2008, wiping out a large part of multi-year gains. Hence the saying, market goes like an escalator and comes down like an elevator. (click to enlarge) Here is another graph that shows SPY monthly returns ( Source: Yahoo Finance data ) during the 2008 crash period. Notice even during the bear market, the bulk of losses (~-46%) came over a short 9-month period from June 2008 to February 2009. Hence the analogy of elevator coming down vertically or fast. (click to enlarge) The above historical perspective presents multiple takeaways that should influence our investing strategy. Given the long runs of Bull market, sitting out of stock market for extended period of time has significant opportunity cost of not participating in Bull rally. If one wants to protect their portfolio in the event of a crash, they need to get out of market early in a crash. However, getting out too early has risks too as it may only be a temporary dip i.e. no crash, market recovers and one has to get back in at a higher price. So timing the market exit is a balancing act between these two scenarios. Exiting out late in a Bear market can double the pain as one will take the losses but not participate in the rally that should be soon to follow. Buy and hold investors who finally give up on stocks after seeing their portfolios trounced for a year or two, have the risk of exiting out at close to bottom of crash. Building a Defensive Strategy: The above takeaways can be formulated to build a variation of Simple Moving Average (SMA) based strategy. For our example, we will use SPY as a representative market index that we play the strategy on. However, the strategy should be verifiable on most indices with varied performance. The SMA gives an overall trend of market direction that is not easily seen with day-to-day variations. So a simple strategy could be to stay long in SPY when SPY is above its say 50-day SMA and sell all holdings when SPY falls below its 50-day SMA. When SPY index is above the SMA, it is pulling the SMA upwards i.e. leading to a positive trend in index. One big drawback of SMA-based strategies is the whipsaw effect. This happens when stock dips below the SMA, we sell the index but then stocks recover, goes above SMA and we get back. Because we are selling at a lower point and then buying back again at a higher price, this leads to a loss. If this happens with large enough frequency, the strategy can lead to sizeable losses and NEGATIVE returns as compared to Buy and Hold. Since history is dominated by large bull runs interspersed with shorter bear runs, it is probably wiser to side on being long for the most part. So we assume that more often than not the market is expected to bounce back after a dip below SMA leading to whipsaw. To reduce the number of times we go out of market and whipsaw, we can use a longer duration SMA. The longer the duration, the less likely the chance of temporary short-term dips breaching SMA and giving a false sell signal. Let’s take 250-day SMA which is equivalent to 1 year in terms of trading days. Further even when SPY touches or breaches the 250-day SMA that is a major support level indicating a high chance of bounce back. So I would propose the sell SPY signal to be even lower, say when SPY has breached more than 2% below 250-day SMA. So let’s assume that we sell SPY when it’s hit more than 2% below 250-day SMA. On top of this, let’s try to take advantage of the fact that once market is sufficiently down, volatility increases and we expect to see several bounce backs from the lows. The bounce back can be temporary though as we don’t know for sure when the actual bottom is or if the bear market is close to end. To take advantage of this short-term bounce backs, we can define a lower point at SMA for market to be oversold. In this zone, we could look to do some bottom fishing by trying to do the reverse, i.e. buy SPY when SPY is below its short-term SMA, say 4-day SMA and sell it as soon as it recovers. So our strategy becomes as follows: Stay long in SPY as long as SPY is greater than -2% (say X) of its 250-day average. Sell and go in cash if it falls below X. If SPY falls below 6% (say Y) of 250-day SMA look to bottom fish. Buy SPY when it is below its 4-day SMA expecting a short term bounce back and sell as soon as it comes back above its 4-day average. These are short-term trades that take advantage of market’s volatility. Now while the thresholds pick (X and Y) may feel like magic numbers, in my test almost all combinations of X and Y where X