Do you remember the advertisements on CNBC in 2015 which described how you could get the yen out of Japan with the WisdomTree Japan Hedged Equity ETFs (DXJ A-)? The ability for an advisor to easily provide exposure to global companies such as Nintendo and Toyota Motor while limiting the impact of fluctuations in the yen against the US dollar was very compelling.

However, advisors have also been able to gain exposure to broader developed markets through ETFs like the Xtrackers MSCI EAFE Hedged stocks ETFs (DBEF B+). DBEF has the same more than 800 voters in the MSCI EAFE Index, companies like AstraZeneca and Nestlé, but mitigates the effects of the movement of 13 currencies, including the yen and the euro.

Currency-hedged ETFs were as popular as Crocs and the ice bucket challenge in the middle of the last decade, but they’ve also largely fallen out of favor. Over the past five years, DXJ had $6.8 billion buyout, while DBEF had $5 billion in net outflows. The iShares Currency Hedging MSCI EAFE ETFs (HEFA B+)which only launched in 2014, has seen $1 billion in net outflows over the past five years. However, in what could be a sign of life, HEFA and DXJ had $230 million and $85 million in net inflows, respectively, in May; DBEF has not been the subject of such a request.

What is surprising in the medium-term demand is that these funds have added value compared to alternative unhedged strategies. During the three-year period that ended June 8, DXJ rose 14% at an annualized rate, ahead of the 3.3% gain for the iShares MSCI Japan ETFs (EWJ A). In 2022, DXJ’s 6.6% gain far exceeded the 15% loss for EWJ.

As of June 8, 2022

DBEF’s returns have also been impressive. Over the past three years, DBEF’s 8.7% annualized return was higher than iShares’ 4.9% return MSCI EAFE ETFs (ALE), Whereas DBEF lost 4.6% in value in 2022, the return of the currency-hedged supply was around 750 basis points lower than that of the unhedged product. HEFAwhich is an almost identical pair of DBEFbehaved as well as ALE.

As of June 8, 2022

With $4.2 billion, $3.8 billion, and $2.0 billion in assets, respectively, DBEF, HEFAand DXJ are smaller than they once were, but they are three of the industry’s survivors. Indeed, the ETFs The graveyard is littered with currency-hedged equity ETFs that died too soon to demonstrate the likely success of recent performance.

In 2017, ProShares Hedged FTSE Japan ETFs (JGHJ), the PowerShares Europe Currency Hedged Low Volatility portfolio (FXEU), and others have ceased operations; the PowerShares brand was also shipped in place of Invesco.

In 2018, iShares Edge MSCI Flight. min hedged in currencies ETFs (HEDV), the Xtrackers MSCI EAFE Hedged Small Cap Equity Fund (DBE), and others have been closed.

In 2019, the JPMorgan Diversified Return International Currency Hedged Index ETFs (JPIH), the WisdomTree Global Hedged Small Cap Dividend Fund (HGSD) and others have been taken off the market.

In 2020, the IQ covered at 50% FTSE Japan ETFs (HFXJ), the iShares Currency Hedged MSCI Italy (HEWI), and others have disappeared.

In 2021, the iShares Adaptive Currency Hedged MSCI EAFE ETFs (DEFA) and FlexShares Currency Hedged Morningstar DM Ex-US Factor Tilt ETFs (TLDH) were sent to the cemetery.

It is understandable that asset managers have lost patience with the return of demand for equity strategies hedged against currency risk. However, given the recent performance of DBEF, HEFAand DXJ, we believe advisors will begin to take a closer look at strategies to energize their portfolios. Unlike five years ago, there are fewer choices to consider.

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