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IndexIQ launches world’s first suite of 50 per cent currency hedged ETFs

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IndexIQ, in partnership with MainStay Investments, has launched three first-of-their-kind ETFs: IQ 50 Percent Hedged FTSE International ETF (HFXI), IQ 50 Percent Hedged FTSE Europe ETF (HFXE), and IQ 50 Percent Hedged FTSE Japan ETF (HFXJ).    

Until now, most investors have had two choices in getting exposure to international equity ETFs: 100 per cent currency hedged or completely unhedged. By definition, use of fully hedged or unhedged exposure requires that investors make an implicit call on the future direction of the US dollar versus foreign currencies. IndexIQ’s new ETFs take a neutral approach, with a 50 per cent currency hedge.

“Our research has shown that 50 per cent hedged portfolios have the potential to capture up to 80 per cent of the risk reduction benefits of a fully hedged approach, while potentially securing steadier performance, regardless of exchange rate fluctuations,” says Chief Executive Officer and Co-Founder of IndexIQ, Adam Patti (pictured). “With the launch of these new funds, investors can now easily add tax-efficient, neutral positioning at the core of their international equity portfolios that is neither actively bullish nor bearish on the direction of the US dollar or foreign currencies.” 

President of New York Life Investment Management and MainStay Investments, Stephen Fisher adds: “In the current and uncertain investment environment, investors are in need of the right solutions to manage their currency exposures. We are pleased to offer the first-ever suite of 50 per cent currency hedged ETFs to the retail and institutional marketplace. These innovative solutions are significant additions to MainStay’s robust mutual fund and ETF line-up and are designed to provide exposure to the important asset class of international equities with a beneficial hedge that dampens relative volatility.”  

According to IndexIQ’s latest research, currency valuations have fluctuated dramatically over shorter time periods – an unpredictability that makes it difficult to know when to go “hedge on” versus “hedge off.”  This is explored in a new white paper entitled, “Hedge of least regret: The benefits of managing international equity currency risk with a 50 per cent hedging strategy,” authored by Robert Whitelaw, IndexIQ’s Chief Investment Strategist and Professor of Entrepreneurial Finance and Chair of the Finance Department at New York University’s Stern School of Business, in coordination with IndexIQ. The paper explains that between 2005 and 2014, there were five calendar years when the value of a basket of foreign currencies decreased versus the US dollar (a situation when a currency hedged approach would have provided better returns) and five calendar years when the value of that same basket of currencies increased versus the US dollar (when an unhedged approach would have provided better returns). As the paper notes, there is no discernible pattern when it comes to currency returns over calendar year periods, or simply the short term.  Further, given the relatively short average holding periods of investors in specific investment vehicles, they are at risk of mistiming the currency trend and investing in the wrong version of hedged or un-hedged at the wrong time.  The 50 per cent approach alleviates the market timing issue for investors. 
    
According to Patti, “The hedging solution offered by HFXI, HFXE and HFXJ removes the need to buy unhedged and 100 per cent hedged ETFs to create a neutral 50 per cent hedge; an ideal portfolio position given the difficulty in forecasting currency movements.  This neutral position would historically have required an investor to spend time regularly rebalancing between two separate investments, which also introduces unnecessary trading costs and tax implications. Our new ETFs help solve this problem and we see them as important options for investors and look to build upon this theme in the future.”

HFXI seeks to track the performance of the FTSE Developed ex North America 50 per cent Hedged to USD Index, which is made up primarily of large- and mid-cap companies in Europe, Australasia and the Far East. 

HFXE seeks to track the performance of the FTSE Developed Europe 50 per cent Hedged to USD Index, which is made up of equities from 17 developed European countries.

HFXJ seeks to track the performance of the FTSE Japan 50 per cent Hedged to USD Index, which is made up of Japanese equities. There is no assurance these objectives will be met.

In each case, approximately half of the respective index exposure is hedged against the US dollar on a monthly basis.

“In recent years, currency has become an increasingly important factor in global equity portfolios and our clients are asking for currency hedged benchmarks that go beyond the 100 per cent hedge ratio available today,” says Ron Bundy, CEO Benchmarks North America, FTSE Russell. “The FTSE 50 per cent Hedged Index Series is designed to assist our clients in gaining a more complete understanding of the impact of currency on their international equity portfolios and we are excited that IndexIQ has chosen FTSE Russell as they offer 50 per cent currency hedged ETFs to their clients.”  

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