iShares, the exchange-traded fund division of asset manager BlackRock, has filed with the Securities and Exchange Commission in the US detailing plans to launch five currency-hedged smart beta equity ETFs. Once launched, this would take their suite of currency-hedged ETFs in the US to 21.
The new ETFs will expand on previous smart beta offerings with currency-hedged versions.
All of the new funds, outlined below, will be based upon existing ETFs but will layer currency protection over the initial methodology.
Four of the new ETFs will apply currency hedges to funds that target the minimum volatility factor, while the fifth will target firms with smaller size.
These include:
The iShares Currency Hedged MSCI EAFE Minimum Volatility ETF, the hedged version of the $3 billion iShares MSCI EAFE Minimum Volatility ETF (EFAV).
The iShares Currency Hedged MSCI EM Minimum Volatility ETF, the hedged version of the $2.6 billion iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV).
The iShares Currency Hedged MSCI ACWI Minimum Volatility ETF, the hedged version of the $2.2 billion iShares MSCI All Country World Minimum Volatility ETF (ACWV).
The iShares Currency Hedged MSCI Europe Minimum Volatility ETF, the hedged version of the $16 million iShares MSCI Europe Minimum Volatility ETF (EUMV).
The iShares Currency Hedged MSCI Europe Small-Cap ETF, the hedged version of the $52 million iShares MSCI Europe Small-Cap ETF (IEUS).
Low volatility strategies have become increasingly popular since the 2008 financial crisis as investors seek more stable returns. Some have pointed to research that low volatility strategies often provide superior returns on a risk-adjusted basis when compared to riskier investments, especially in a down-turning market where risky assets tend to become more erratic.
Low volatility ETFs have historically outperformed broad market indices when back tested over multiple data sets. One theory for this is that investors may be overly optimistic regarding high volatility, growth stocks which has pushed up their price beyond fundamental value. At the same time, investors may shun out-of-favour, low volatility value companies that are actually trading cheaply. As such, low volatility ETFs have historically provided superior returns than the market as they may contain a bias towards undervalued companies.
Currency-hedged ETFs have been in high demand in the US as continuing divergence of monetary policies around the world adds strength to the dollar relative to other currencies, and hindering returns on international investment by US investors. As a Federal rate increase is likely to occur before the end of the year, further strengthening the greenback, these ETFs are sure to attract plenty of interest.