The FlexShares Currency Hedged Morningstar DM ex-US Factor Tilt Index Fund (TLDH) offers exposure to developed markets outside the U.S., an asset class that includes many of the largest economies in Europe and Asia. The ETF invests exclusively in its sister fund, FlexShares Morningstar Developed Markets ex-US Market Factor Tilt Index Fund (TLTD), and then layers on contracts meant to hedge the risk of currency fluctuations. The currency hedging is why TLDH has a higher fee than TLTD.
To know whether TLDH is a good pick, investors first need to understand TLTD. Developed ex-U.S. stocks are generally a core holding in long-term, buy-and-hold portfolios, and TLTD is one of several ETFs that can be used to achieve exposure to this asset class. The unique attribute of TLTD is its tilt towards small cap and value stocks, based on the premise that these types of securities have the potential to generate excess returns over the long run.
Investors then need to ask themselves whether they want to hedge their currency risk. Currency fluctuations are a major driver of returns and losses, and some analysts argue that currency exposure diversifies risk for investors whose portfolios are dominated by U.S. dollar-denominated securities. TLDH has frequently outperformed its un-hedged sister fund but currencies are notoriously volatile.
Aside from those considerations, there’s the cost to consider. TLTD, the unhedged ETF, allows investors to maintain broad-based exposure to this asset class, but its tactical tilt comes with a higher price tag. TLTD isn’t outrageously priced, but there are plenty of ETFs that offer similar exposure for a much lower management fee, such as the Vanguard FTSE Developed Markets ETF (VEA). There are also other currency-hedged options worth looking at, like the Xtrackers MSCI EAFE Hedged Equity ETF (DBEF) or the iShares Currency Hedged MSCI EAFE ETF (HEFA).