Fickle Dollar Spurs a New Breed of ETFs as Competition Grows

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Investors frustrated with the stop-start path of dollar appreciation have another international strategy to consider: exchange-traded funds that remove some, but not all, currency exposure.

New York Life Insurance Co. is starting three such products, using forward contracts to hedge out half the foreign-exchange risk of the underlying securities, according to Adam Patti, chief executive officer of IndexIQ, the insurer’s ETF unit. The funds, which invest in equities and focus on Europe, Japan, and a broad international benchmark, begin trading on the New York Stock Exchange on Wednesday.

Competition for a share of the more than $42 billion that’s flowed into currency-hedged products this year is rife, with fund providers including BlackRock Inc. and WisdomTree Investments Inc. starting products this month. As gains by the dollar moderate and investors switch back to unhedged bets, fund companies are finding a need to get creative.

“Even in periods where the dollar has strengthened consistently over time, there are big dips,” Patti said by phone on Tuesday. “We believe the 50 percent hedge is the optimal hedge.”

Dollar Stalls

Dollar gains have stalled in recent weeks, with the euro advancing 1.6 percent in the past three months, trimming a 19 percent slump over the past year. Currency-hedged U.S. ETFs took in $137 million across 60 products in the week through July 10, the least since December and down from a peak of $3.5 billion in the week ending March 13.

“You’re going to get periods of dramatic either underperformance or overperformance for either the 100 percent hedged or either the 100 percent unhedged,” said Robert Whitelaw, chief investment strategist at IndexIQ and chairman of the finance department at New York University’s Stern School of Business. “Fifty percent really is the sweet spot. In terms of returns, you’re basically going to be right in the middle.”

IndexIQ, which is based in Rye, New York, is also looking to market products focused on Germany and emerging markets soon, Patti said.

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