Deutsche Bank Debuts Suite Of Currency Hedged Equity ETFs

by on June 10, 2011 | ETFs Mentioned:

Deutsche Bank rolled out the latest additions to an ETP lineup that is rapidly approaching 1,300 on Thursday, debuting five ETFs that offer exposure to international equity markets while stripping out the impact of fluctuations in value of the U.S. dollar and non-U.S. currencies. Each of the new products are linked to MSCI indexes, offering exposure to the same basket of companies delivered by many of the most popular existing ETPs. The new hedged equity ETFs include:

  • MSCI Japan Currency-Hedged Equity Fund (DBJP)
  • MSCI Brazil Currency-Hedged Equity Fund (DBBR)
  • MSCI Canada Currency-Hedged Equity Fund (DBCN)
  • MSCI EAFE Currency-Hedged Equity Fund (DBEF)
  • MSCI Emerging Markets Currency Hedged Equity Fund (DBEM)

Currency Hedge Difference

In addition to offering exposure to the stocks of a particular country or region, most international equity ETFs effectively establish a long position in the local currency and a short position in the U.S. dollar. When the value of the dollar is declining, that exposure can work in favor of U.S. investors, as exchange rate fluctuations enhance their returns. But when the dollar strengthens, the currency impact can offset gains or exacerbate losses experienced in the underlying stocks [see the full list of Currency ETFs here].

The impact of currency movements on equity returns can often be substantial. The PowerShares DB U.S. Dollar Index Bearish (UDN), which measures the performance of a short position in the greenback against a basket of developed market currencies, has gained about 20% over the last year. The WisdomTree Dreyfus Emerging Currency Fund (CEW), which effectively offers exposure to a variety of emerging market money market funds, has gained more than 10% over the last year.

The new suite of ETFs offers a way for investors to achieve exposure to international stocks without taking on exchange rate risk. “Deutsche Bank is filling a need in the marketplace by offering investors direct access to global markets with a built-in hedge against currency fluctuations,” said Martin Kremenstein, Chief Investment Officer and Chief Operating Officer of Deutsche Bank’s db-X business. “The newest Deutsche Bank ETFs provide investors direct access to some of the world’s most significant international markets with the goal of allowing investors to better manage their portfolios currency risk by capitalizing on Deutsche Bank’s industry-leading foreign exchange expertise.”

The Deutsche Banke ETFs will hedge out currency exposure by using one month forward contracts [see Advanced Currency ETF Investing].

Potential Uses

Each of the new ETFs can be seen as a potential alternative to the existing ETFs offering exposure to the traditional MSCI indexes (DBEM, for example, may be appealing as an alternative to EEM and VWO). Investors who are bearish on the U.S. dollar may want to remain unhedged, utilizing the traditional MSCI-linked ETFs offered by iShares and Vanguard. Those who expect the dollar to perform well against rival currencies will likely want to remain hedged, perhaps by using the new Deutsche Bank funds. Investors with no strong opinions over future exchange rate movements may want to use a mix of hedged and unhedged exposure [see Do You Need A Hedged Equity ETF?].

Both DBJP and DBEF will compete directly with existing currency hedged product from WisdomTree, the Japan Hedged Equity Fund (DXJ) and International Hedged Equity Fund (HEDJ)

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Disclosure: No positions at time of writing.