Euro Slide Gives New Life to Currency-Hedged ETFs Losing Luster

  • Investors add $579 million to currency-proof funds after ECB
  • Inflows help to avert worst month in more than two years

Exchange-traded fund providers breathed a sigh of relief when European Central Bank President Mario Draghi revealed last week policy makers in the euro area are considering further monetary stimulus.

Draghi’s statement revived a decline by the region’s currency and, with it, one of the year’s most popular ETF strategies: protecting against foreign-exchange volatility. Investors have directed $579 million into the 87 hedged ETFs in the U.S. since the Oct. 22 ECB meeting, mitigating what was to be an outflow and the worst month for the products in more than two years.

“Draghi clearly indicated that he’s ready to act,” said Monish Shah, the New York-based head of ETF business at Mizuho Securities USA Inc., who predicted the flow revival in a client note last month. “If the euro’s declining, you need a product wherein you can go long equities and short the euro and that’s exactly what a currency-hedged ETF does.” A long position is a bet on an asset class, while a short position is the reverse.

Currency-hedged ETF have attracted almost $47 billion this year, the most most on record. The funds lost some of their luster in recent months as currency volatility declined amid unchanged policy in Europe and signs that the Federal Reserve would delay its first rate increase since 2006. Now, with the U.S. central bank signaling that it may still move in December, just days after the ECB meets to discuss further stimulus, products that protect against currency fluctuation are back in vogue.

The euro slumped to a two-and-a-half-month low on Oct. 28. It traded at $1.1048 as of 12:04 p.m. in New York.

That’s good news for ETF providers, such as WisdomTree Investments Inc., whose two largest funds are currency hedged.

“Draghi reaffirmed that they are committed to, although they didn’t take any specific action, more quantitative easing,” Jonathan Steinberg, WisdomTree’s chief executive officer, said by phone after releasing quarterly earnings on Friday. That “seems to be a very good environment for currency hedging.”

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