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Currency-hedged ETFs gather pace

Currency-hedged funds took four of the top 10 spots in ETF inflow league tables for April, in what may suggest local investors' conviction to a change in US dollar's strength.

April saw net inflows of about $1 billion into ASX-listed ETFs, taking the local ETF market to $61.3 billion in funds under management. Investors were most attracted by equities and cash ETFs during the month.

Of the 10 ETFs that attracted the most new money, currency-hedged ETFs took four spots, totaling $427 million, across iShares S&P 500 AUD Hedged ETF (IHVV), VanEck Vectors MSCI World Ex-Australia Quality (Hedged) ETF (QHAL), BetaShares US Equities Strong Bear Currency Hedged (Hedge Fund) (BBUS) and BetaShares Crude Oil Index ETF - currency hedged (synthetic) (OOO).

QHAL has slightly higher inflows than its unhedged counterpart QUAL for the month, at about $55 million to $51 million for unhedged. Meanwhile, OOO and BBUS are not available in unhedged versions.

The inflows into hedged ETFs may suggest that many local investors are of the view that the US dollar's strength may be turning, according to BetaShares.

"The merits of hedging were again demonstrated over April, with the AUD appreciating from US61.4c to US65.7c over the month," BetaShares said.

"For example, investors who turned to gold in response to sharemarket volatility benefitted from the metal's strong rally - with the currency-hedged BetaShares Gold ETF (ASX: QAU) returning 6.5% for the month."

"By comparison, an unhedged gold exposure over the month would have seen the benefit of the entire gold rally eroded by the rise in the AUD, with the unhedged gold bullion price actually declining by ~1% over April," it said.

Zenith Investment Partners head of real assets and listed Strategies Dugald Higgins said most of their portfolios use a 50-50 approach to hedged and unhedged exposures in international equities.

In very broad terms, Australian funds that are unhedged usually perform better when A$ is falling, while hedged funds perform better when A$ is rising.

"We would says if you are in an international asset class [fund] for long-term of five years or more, the effects of currency wash out. Obviously you can't predict what currencies are going to do in five years, so most people like to have a foot in both camps with a 50-50 hedged and unhedged split," Higgins says.

However, in recent months, he has noticed an up tick in people wanting to make directional calls about A$'s movement with respect to other currencies.

"Among our clients, we are seeing a greater demand for hedging, and we ourselves take a blended approach [hedged and unhedged] in our portfolios."

Read more: BetaSharesZenith Investment Partners
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