According to Bloomberg data, assets in currency-hedged exchange-traded funds had more than halved by the beginning of 2018 from their 2015 peak of $63 billion. Yet about 81% of hedged funds have outperformed their unhedged equivalents over the last 12 months, a figure that rises to 89% over a five-year time frame.
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Sal Bruno, |
The problem is that many investors came late to the game, and by the time they got into these funds the dollar rally had stalled. Being hedged was not a good option in 2017 as the dollar was weak relative to the US’s biggest partners.
The environment was benign during the early part of 2018, but in the second quarter the dollar began to strengthen across a range of currencies – particularly the renminbi but also the euro and the pound – on the back of US president Donald Trump’s spats over trade and tariffs.
A typical investor’s perspective would therefore be that the US currency was weak in 2017, and while it has gained ground over the last six to eight months, says IndexIQ chief investment officer Sal Bruno, it is unclear whether that rally will continue into 2019 or whether the US is coming to the end of its tightening cycle.
