NEW YORK Feb 4 BlackRock Inc's iShares, the largest U.S. provider of exchange-traded funds, is launching a new set of currency-hedged ETFs on Tuesday as it looks to target investors interested in international equity exposure but concerned about potential losses from a rising U.S. dollar.
The new iShares ETFs, which are set to begin trading Tuesday on the NYSE Arca, will focus on Japan, Germany, and EAFE countries, which include developed markets outside of the U.S. and Canada. The ETFs hedge by using foreign currency forward contracts, which allow market participants to lock in an exchange rate on a specific date.
"There's much more attention paid to the fluctuations of currency, particularly in a year where we believe U.S. interest rates are rising, likely strengthening the U.S. dollar," said Daniel Gamba, head of iShares Americas institutional business, in an interview.
But currency hedging, which can protect against a rising U.S. dollar, can also limit potential gains if the U.S. dollar weakens against a foreign currency.
"When you're looking to hedge or mitigate a certain source of risk, in this case currency risk, you're also simultaneously hedging or dampening the associated source of return, be it positive or negative," said Ben Johnson, a Chicago-based ETF analyst at Morningstar. "It's important to understand what the tradeoff implies."
With these new ETFs, BlackRock joins WisdomTree Investments Inc and Deutsche Bank AG's asset and wealth management business in an area of the ETF market that saw significant inflows in 2013. Investors poured roughly $9.8 billion into WisdomTree's Japan Hedged Equity Fund last year, making it one of the biggest ETF asset gatherers in 2013.
BlackRock, which bought the iShares ETF business from Barclays in 2009, currently has 30 internationally-domiciled currency-hedged ETFs, the oldest of which were launched a decade ago in Canada. These new ETFs will be the first U.S.-listed currency-hedged ETFs for iShares, which plans to launch additional international currency-hedged ETFs later this year.
"The way to think about this product is you'll be able to invest as a local investor," Gamba said. "If you think the local economy is going to grow more, then hedging the currency will give you a cleaner return and allow you to invest as if you were a local investor in the local market."
The new ETFs track MSCI hedged equity indexes, which include exposure to local industries, including telecommunications and utility sectors.