Dollar Doubters Stoke ETF Battleground for BlackRock, WisdomTree

Updated on
  • Funds with flexible currency hedges to start trading Thursday
  • Dollar gains slow after advance versus 16 peers in 2015

The dollar’s trajectory lies at the heart of the latest tussle for a share of the $2.1 trillion U.S. market for exchange-traded funds.

BlackRock Inc., the world’s largest asset manager, and WisdomTree Investments Inc., whose Europe Hedged Equity Fund has absorbed more cash than any other ETF in the last 12 months, are starting products that take a flexible approach to mitigating dollar strength when buying international stocks. The funds -- three from BlackRock and four from WisdomTree -- expand or contract hedges to reflect market moves, spokespeople for the companies said. All start trading Thursday. The companies already sell funds that aim to fully hedge currency exposure.

Investors are reassessing expectations for dollar appreciation after the greenback strengthened against all 16 of its major peers last year. Almost $47 billion flowed into hedged products in the 12 months through December as U.S. money managers sought refuge from the dollar’s advance, which can sap the value of investments abroad when money is repatriated. With dollar gains moderating in recent months, interest in such products has ebbed, encouraging ETF providers to innovate.

Nimble Hedging

“There are some signals that can help predict when hedging is more beneficial and when it’s less beneficial,” Jeremy Schwartz, director of research at WisdomTree in New York, said Wednesday. “This new family is a very nice middle ground of getting all the main benefits of risk reduction from currency hedging, but then also participating in the gains when you do see currencies rising.”

The greater the hedge, the more protection investors have against dollar gains.

New York-based BlackRock will determine the hedges using a ratio that incorporates calculations such as a currency’s momentum and volatility, it said in a press release Wednesday. A euro-area fund will start with a 50 percent hedge, while a Japan-focused ETF will have a 25 percent hedge, Ruth Weiss, the San Francisco-based head of U.S. product at BlackRock’s iShares unit, said by phone. A third fund will target Europe, Japan and certain other developed markets.

WisdomTree has partnered with Record Currency Management Ltd., a U.K.-based currency manager that oversees more than $50 billion, to determine hedge ratios, Schwartz said. Its European fund will be 83 percent protected at inception, while its Japan offering will have a 50 percent hedge. WisdomTree is also starting a broad international fund and a fund focused on small-cap companies.

Dollar Consensus

The euro is projected to weaken 2.7 percent versus the dollar by the end of June, while the yen is expected to depreciate 4.6 percent, according to the median forecasts of analysts compiled by Bloomberg.

“You’re really taking all the guesswork out of currency hedging,” BlackRock’s Weiss said. “If you think about ideally who we design them for, it’s somebody who wants that medium- to long-term exposure to the equity without having to worry about switching between hedged and unhedged over time.”

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