Do you hear that? That stampeding sound you hear is coming from fund managers scurrying to get into the currency-hedging trade.
Currency hedging ETFs have been in vogue this year given the ultra-lose monetary policy across the globe and a strong U.S. dollar against a basket of other currencies. The bullish trend in the dollar is likely to continue as the Fed is primed to increase interest rates for the first time since 2006 later this year, as the U.S. economy roars back to life.
While cheap money flows are making international investment a compelling opportunity for U.S. investors this year, a strong dollar could wipe out the gains when repatriated in U.S. dollar terms, pushing international investment into the red in spite of well performing stocks. As a result, investors are flocking to currency hedged ETFs. This has a double benefit. While these ETFs tap bullish international fundamentals, they dodge the effect of a strong greenback.
As is often the case on Wall Street, the natural worry is whether the rush might come too late. Foreign exchange dynamics present earlier this year have abated somewhat, making the need to protect against currency movements less urgent for the moment.
With the race to the bottom heating up among global central banks, it’s no wonder fund managers are looking to capitalize.