iShares – the San Francisco-based market leader in the ETF industry – has already won investors’ hearts by issuing several billion-dollar ETFs in almost each asset class and geographical region. Since the issuer has been leaving no stone unturned in rolling out products on varied themes, it has launched a currency hedged ETF in the emerging market (EM) field lately.
This is not the first time that iShares is coming up with such a concept as it has already introduced a pack of currency-hedged products this year. Needless to say, currency hedged ETFs have become the name of the game this year with the U.S. dollar surging to multi-year highs.
iShares did not enter into too many complexities while rolling out these new currency hedged funds as it just put out currency-hedged versions of its ‘regular’ products. The new emerging market ETF is also not an exception, being only a currency-protected edition of iShares ultra-popular emerging market ETF iShares MSCI Emerging Markets ETF (EEM). The new ETF trades under the name iShares Currency Hedged MSCI Emerging Markets ETF (HEEM).
HEEM in Detail
The ETF will charge 70 bps in fees versus 67 bps charged by EEM. Obviously, currency hedging will charge more than the ‘regular’ approach. HEEM attains its objective by tracking MSCI Emerging Markets 100% USD Hedged Index.
For investors interested in the holding pattern of the ETF, we highlight the details of EEM below. The fund is made up of the common stocks of companies across more than 20 countries. EEM is heavily weighted toward China (18.42%), South Korea (14.96%) and Taiwan (11.83%) which have more than two-fifth share in the basket. The fund provides sufficient diversification as around 16% of the asset base goes to the top 10 holdings.
Samsung (3.03%), Taiwan Semiconductor (2.46%) and Tencent (1.94%) hold the top three positions in the fund. As for sectors, Financials (27.5%) takes the top spot followed by Information Technology (16.5%), Energy (10.0%) and Consumer Discretionary (8.9%).
HEEM follows a currency-hedged approach, which means that when the dollar is strengthening, a hedged investment can outperform an unhedged one, making currency-hedged picks better ideas for investors.
How Does it Fit in a Portfolio?
This ETF could be appropriate for investors seeking a currency hedged play in the international arena. Emerging markets have long been investors’ favorites due to their high growth potential. Though this space faltered last year on taper concerns, it has rebounded this year greatly on compelling valuation, stimulus announcements in some nations and pro-growth political reforms in others.
This undoubtedly warrants a look at the emerging market pack to earn some quick gains. However, this return can be curtailed on repatriation as the U.S. dollar is hovering at multi-year highs on QE taper and rising rate risk for next year. In such a scenario, possessing HEEM, which is protected from currency translation, in one’s portfolio might be a wise decision.
There are a few hedged ETFs in the emerging market pack with Deutsche X-trackers MSCI Emerging Markets Hedged Equity ETF (DBEM) being one of the biggest threats for HEEM. Though we have seen a flurry of single-country hedged ETFs so far, competition is still less in the broader emerging markets space.
Like iShares, Deutsche Bank also had a hands-on approach in offering hedged ETFs in the start of the year. In January, Deutsche Bank rolled out a collection of hedged ETFs targeting Mexico, all-world excluding U.S. and South Korea.
Investors should note that DBEM charges 65 bps in fees which is lower than the fee of the newly launched HEEM. However, investors fascinated by the billion-dollar ETF EEM might not find this slightly higher cost a hurdle and might pour their money into HEEM instead.
ISHARS-EMG MKT (EEM): ETF Research Reports
DEUTS-XT MS EM (DBEM): ETF Research Reports
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