The FlexShares Currency Hedged Morningstar EM Factor Tilt Index Fund (TLEH) offers exposure to emerging market economies, an asset class that includes many of the largest economies in Europe and Asia. The ETF invests exclusively in its sister fund, FlexShares Morningstar Emerging Markets Factor Tilt Index Fund (TLTE), and then layers on contracts meant to hedge the risk of currency fluctuations. The currency hedging is why TLEH has a higher fee than TLTE.
To know whether TLEH is a good pick, investors first need to understand TLTE. Given the tremendous growth potential of developing economies, many investors now make substantial allocations to this asset class. The unique attribute of TLTE is its tilt towards small cap and value companies. This feature is based on evidence suggesting these types of securities may deliver excess returns over the long term.
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. Currencies are notoriously volatile. TLEH has at times beaten its un-hedged sister fund while other times it lags.
Aside from those considerations, there’s the cost to consider. TLTE, the un-hedged version of this ETF, is one of several funds in the Emerging Markets Equities ETFdb Category that can be used to tap into this corner of the market. But the FlexShares tactical tilt comes with a higher price tag. TLTE 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 Emerging Markets ETF (VWO). There are also other currency-hedged options worth looking at, like the Xtrackers MSCI Emerging Markets Hedged Equity ETF (DBEM) or the iShares Currency Hedged MSCI Emerging Markets ETF (HEEM).