Foreign-Exchange Hedged ETF Demand Slows as Volatility Declines

Demand for exchange-traded funds that provide investors with protection against swings in exchange rates is slowing as volatility in currency markets eases.

U.S. hedged ETFs attracted $204 million in the week through June 19, the least since December, data compiled by Bloomberg show. The funds have been among the most popular ones among investors, attracting $39.8 billion this year.

Money managers flocked to hedged ETFs as rapid declines by the euro and the yen imperiled international returns from buoyant overseas stock markets. Now, as that volatility declines, investors are reassessing whether hedging still makes sense.

“What we’re looking for is almost a little bit of the currency moves slowing down,” James Gardiner, a managing director at JA Forlines LLC in Locust Valley, New York, said by phone. “We came into the year much more hedged against the very strong dollar. We’ve been shading that as the year’s progressed into the summer,” he said of the company’s European exposure. JA Forlines has about $400 million under management.

A JPMorgan Chase & Co. measure of currency price swings declined to its lowest since May 19 on Monday.

The euro is forecast to fall another 7.4 percent by year-end, while the yen is predicted to decline 2.1 percent, the median estimates of analysts surveyed by Bloomberg News show.

Investors directed the least in six weeks into WisdomTree Investment Inc.’s hedged Europe fund, the largest currency-hedged ETF in the U.S. Money managers also pulled cash from the ETF provider’s hedged Japan fund, the first outflow since the week ending Dec. 19.

An unhedged Europe fund run by BlackRock Inc.’s iShares unit by contrast had its best week since April, while a naked Japan product attracted the most money in seven weeks.