BlackRock Targets ETF Investors With Flexible Currency Hedging

  • Money manager proposes funds using dynamic approach to hedging
  • Plan expands choices beyond 100% hedged or unhedged products

BlackRock Inc., the world’s largest asset manager, is changing course on exchange-traded funds that protect against currency volatility.

After stressing the easy switch between hedged and unhedged ETFs as a selling point for its existing funds amid the dollar’s surge since 2014, the company plans to create a set of ETFs targeting buy-and-hold investors wary of foreign-exchange swings. The funds will have a flexible hedge that expands or contracts in response to market trends, documents filed this month with the U.S. Securities and Exchange Commission show.

“That would be stickier money,” David Perlman, an ETF strategist in New York at UBS Wealth Management, said of demand for funds with an adjustable hedge. “The ones where you’re 100 percent hedged or 100 percent unhedged lend themselves more to tactical positioning. Whereas, when you’re buying this, you’re pretty much outsourcing the tactical decision about whether to be hedged or unhedged to the ETF.”

Investors have been left second-guessing what’s next for currencies after a dollar rally that lifted the U.S. currency to a more-than-decade high. ETF providers face their own dilemma: how best to pitch hedging, a strategy that’s surged in popularity during the past two years, in times of lower volatility. About $48 billion is at stake for those that can get it right, 2015 inflows show.

With about $75 billion in assets, currency-hedged funds remain a tiny portion of the $2.1 trillion ETF industry in the U.S. Dynamic hedged products may appeal to investors who want to mitigate the damage that sharp currency moves can do to overseas returns when translated back into dollars, while maintaining the potential upside of currency exposure when markets are stable.

Paul Young, a spokesman at New York-based BlackRock, declined to comment beyond the firm’s filings.

WisdomTree Investments Inc., whose Europe hedged fund has attracted more inflows than any other U.S. ETF this year, is also planning additions to its lineup that offer adjustable currency hedging, recent filings show.

Flow Shift

BlackRock, which runs 22 U.S. equity funds that seek to fully mitigate currency risk, plans three ETFs with adaptive hedges, focusing on stocks in the euro area, Japan and developed markets.

The added funds will track indexes constructed by MSCI Inc., which computes the appropriate currency hedges using a ratio that incorporates calculations of a currency’s carry, value, momentum and volatility. A zero percent, 25 percent, 50 percent or 100 percent currency hedge is then assumed by the index and applied by the ETF.

BlackRock and WisdomTree may see outflows from their existing currency-hedged products as some long-term investors and retail clients with less expertise opt for the latest offerings.

“There’s probably going to be some percentage of it that’s cannibalization of existing products,” said Will McGough, a senior vice president and portfolio manager at Stadion Money Management, which owns shares in WisdomTree’s hedged Europe fund as part of $3.8 billion under management. “Day one, we would probably not be interested, but we will be very interested observers to see how they perform.”

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