Europe’s third largest provider of exchange-traded funds, Lyxor, has unveiled a new ETF offering US dollar-hedged exposure to the FTSE 100 Index. The Lyxor UCITS ETF FTSE 100 – Monthly Hedged C-USD (LSE: 100H) is the first ETF in Europe to provide investors with exposure to the FTSE 100 and protect against adverse movements in the British pound against the US dollar.
The Lyxor UCITS ETF FTSE 100 – Monthly Hedged C-USD (LSE: 100H) is the first ETF in Europe to offer exposure to the FTSE 100 Index while mitigating currency risk for US dollar investors through the use of currency forward contracts.
The FTSE 100 Index is the flagship reference for large cap blue-chip stocks listed in the United Kingdom. The new fund may appeal to US dollar investors who are concerned about future volatility in the pound following the UK’s vote to leave the European Union. Since the vote on 23 June 2016, the FTSE 100 Index, has risen roughly 6.6%, while the pound has fallen 11.1% against the US dollar, resulting in a net loss for US dollar investors.
Francois Millet, Head of ETF and Index Product Development at Lyxor said: “The recent depreciation of GBP has left many investors outside the UK wary of the UK equity market. Our new ETF enables investors to access the performance of UK equities whilst maintaining protection against falling currency rates.”
According to Lyxor, a weak currency and a Bank of England accommodative stance should support UK stocks with significant international exposure. Large-cap companies tend to have an increased international presence with roughly 70% of the sales of FTSE 100 companies coming from outside the UK and are denominated in foreign currencies.
To protect investors from further pound depreciation, Lyxor’s new ETF tracks a version of the FTSE 100 Index that includes a layer of currency forward contracts. The forward contracts are re-balanced monthly to maintain protection. In this way US dollar investors are able to isolate and receive only the pure-play performance of the FTSE 100 Index without being influenced by currency performances.
Stephane Degroote, Head of ETFs and Derivatives, EMEA, at FTSE Russell, added: “We are pleased that Lyxor has chosen to license FTSE Russell indexes for its new product, reflecting the premium quality, transparency and innovative design of our benchmarks and our strong governance. The FTSE currency hedged indexes are constructed by adding a layer of currency forward contracts to the underlying unhedged indexes, allowing leading providers such as Lyxor to launch products that protect investors from currency fluctuations.”
The ETF may also appeal to British pound investors who essentially wish to make a double bet that both the British pound will depreciate against the US dollar and that the FTSE 100 Index will increase in value. These investors’ total return will be comprised of the return on the FTSE 100 Index and the return on the underlying currency forward contracts.
While this is the first ETF on the LSE to offer US dollar-hedged exposure to the FTSE 100 Index, there are a number of significant, low cost ETFs targeting an unhedged investment in the index. The largest ETF (in terms of assets under management) tracking the FTSE 100 Index is the iShares Core FTSE 100 UCITS ETF (LSE: ISF), with over £4.0bn in AUM as of 27 July 2016. It is also one of the cheapest means of accessing the index with total a total expense ratio of just 0.07%. Other significant ETFs referencing the FTSE 100 Index include the Vanguard FTSE 100 UCITS ETF (LSE: VUKE), which holds over £2.2bn in AUM and carries total fees of 0.09%; and the UBS FTSE 100 UCITS ETF (SIX: 100UKD), holding over £140m in AUM and carrying a total expense ratio of 0.20%.
The ETF has a total expense ratio of 0.30%.