AAXJ iShares MSCI All Country Asia ex Japan

Thanks to some efforts by Japan to weaken their currency, investors have begun to embrace hedged ETFs for international exposure. This has been a pretty solid strategy too, as hedged Japan funds have easily outperformed their unhedged cousins over the past year, with gains of more than 60% seen in some products compared to 30% gains in unhedged counterparts.

While this has been great news for ETFs like DXJ which has attracted the lion’s share of the assets, the real winner was in the db X-Trackers MSCI Japan Hedged Equity ETF (DBJP). This fund easily outperformed DXJ, and though it still lags in terms of assets, it has seen a surge in interest as well (see Time to Focus on Yen Hedged Japan ETFs?).

Thanks to this, Deutsche Bank is now looking to expand its lineup of funds (under the db X-Tracker brand), targeting other regions and nations with a currency-hedged approach. The company has put out three such products, and we have highlighted some of the key details about each below:

db X-Tracker MSCI United Kingdom Hedged Equity Fund (DBUK)

If investors want targeted exposure to the UK without the risks from a depreciating pound, DBUK could be a solid pick. The ETF tracks the MSCI United Kingdom US Dollar Hedged Index, charging investors 45 basis points a year in fees for the exposure.

The underlying index has about 100 stocks in its basket, and pays a solid yield of over 3.7%, suggesting it may be a solid choice for income too. In terms of sector and individual holdings, financials, energy and consumer staples all take up sizable allocations (at least 16.6%), while HSBC, Vodafone and BP take the top individual spots and all account for at least 5% of the total.

db X-Trackers MSCI Europe Hedged Equity Fund (DBEU)

For broad European exposure, DBEU is an interesting choice, charging investors 45 basis points a year. The product tracks the MSCI Europe US Dollar Hedged Index, tracking the return of stocks in 16 different European nations, without currency risks (see all the European Equity ETFs here).

Financials take the top spot at 21.3% of the portfolio, and are followed by consumer staples (14.2%), health care (12.7%), and industrials (11.5%). The index has over 440 constituents in its basket, and no single company makes up more than 3% of the total. Country exposure is heavily tilted to the UK (33.7%), while France, Switzerland, and Germany receive double digit allocations as well.

db X-Trackers MSCI AC Asia Pacific Hedged Equity Fund (DBAP)

This fund tracks the MSCI Asia Pacific ex-Japan US Dollar Hedged Index, charging investors 60 basis points a year in fees. The product is exposed to a number of countries from around the region, including Australia, China, South Korea, Taiwan, and Hong Kong just to name a few.

Top sector holdings include financials (37%), technology (14.5%), materials (9.3%), while no single security makes up more than 5% of assets. The fund also looks to be a bit of a yield destination, as the index dividend yield comes in at 3.05%.

How These Might Fit in a Portfolio

These ETFs are built for investors who believe that the dollar will strengthen, or at least that major European and Asian currencies will tumble against the greenback.  When this situation occurs, these ETFs will likely outperform their unhedged counterparts (read The Key to International ETF Investing).

Meanwhile, when foreign currencies are strengthening, these ETFs could lead to some underperformance for dollar-based investors, at least when compared to those that aren’t using hedging techniques. So, make sure you believe that the dollar will strengthen against the above countries’ currencies before taking a dip into any of these products.

Additionally, investors should note that the expense ratios are going to be a bit higher here, thanks to the more involved process of hedging. Volume levels may also be light initially, so bid ask spreads may be tight as well, though competition is likely to be minimal for investors seeking currency-hedged exposure.

Bottom Line

There aren’t a whole lot of direct competitors to these products, at least in terms of hedged foes. There are, however, a host of unhedged competitors out there in these markets (also see 4 Unbeatable ETF Strategies for Q4).

In particular DBUK could see some heavy competition from EWU, while DBEU may face competition from VGK and EZU, and DBAP could see some worries from AAXJ. And, all of these competitors have more than $1 billion in assets each, so they could definitely act as a wall for Deutsche Bank’s efforts at accumulating fresh assets.

However, should currencies in Europe and Asia face weakness against the dollar, these new products could outperform their more entrenched competitors. If this happens, we could see some solid inflows, though look for the initial build up—and volume levels—to be slow going at first in this increasingly popular corner of the exchange-traded fund world.

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ISHARS-MS AS-JP (AAXJ): ETF Research Reports
 
DB-XT MS JAP HD (DBJP): ETF Research Reports
 
ISHARS-UTD KING (EWU): ETF Research Reports
 
VANGD-FTSE EUR (VGK): ETF Research Reports
 
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