Currency-hedged ETF surge prompts hedging concerns

ETF providers are expanding their roster of currency-hedged products as investors hunt for cheaper ways to exploit the decoupling of equity and currency performance in developed countries. The interest is spurring a new wave of innovation – and prompting a debate on how effective different hedging mechanisms may prove to be in practice

Loose monetary policies pursued by central banks in the wake of the financial crisis have left equity investors in a bind. The access to cheap financing permitted by quantitative easing in various countries has inflated equity valuations and encouraged inflows into exchange-traded funds (ETFs) that track them, but the significant currency depreciation that comes with easing means the cumulative returns available to overseas investors are being eroded.

Large institutional players are able to