Flows into currency-hedged ETFs have picked up this year as investors look to protect themselves against the impact of potential sharp currency fluctuations.
In the first seven months of the year, investors poured $1.3bn into currency-hedged ETFs tracking European equities, according to Reuters, a reversal from the $9.2bn of outflows from these products seen during the same period last year.
Globally, investors have poured $17bn into currency-hedged equity ETFs, suggesting a very different sentiment to this time last year, when they saw $9.2bn of outflows overall. In total, currency-hedged ETFs house $127bn of assets globally, according to ETFGI.
Investors are reacting to a strong run for the European single currency, which has risen some 12% so far this year to become the best performing G10 currency, amid warnings its strength could hurt European equity returns.
Earlier in the year, investors were also driven into euro-hedged products by worries around the French election and whether its outcome could signal the rise of populism in the Eurozone; in April alone, flows into these products shot up to $638m, from just $6m the previous month.
But the euro has not been alone in keeping investors on their toes. The 15% fall in the British pound following the Brexit referendum also had a profound effect on its stock market, sending the FTSE 100 to record highs as it benefitted companies with overseas earnings.
Last week, sterling fell to its lowest level against sterling in eight years, fuelling demand for sterling-hedged ETFs as investors prepare for a potential rebound, according to analyst quoted by Reuters.
US dollar hedging
Meanwhile, as the US dollar suffers on the back of worries over President Donald Trump’s ability to push his promised pro-growth reforms through Congress, inflows into US dollar-hedged ETFs have also increased this year. They have taken in $5.9bn to the end of July, already beating the $5.3bn in net sales over the whole of 2016.
ETF Securities, for example, reports an uptick in inflows into short USD ETFs so far in August, with $13.3m of net sales of these product since the beginning of the month to 18 August, following the publication of the latest FOMC meeting minutes that revealed a lack of consensus at the Federal Reserve.
During the week to 11 August, inflows into short USD-long EUR ETPs at the firm rose by $3.6m, despite the European Central Bank (ECB) voicing concerns about the strength of the euro in its own July meeting minutes.