ETFs
Currency-hedged ETFs can be interesting election plays
The first presidential debate is scheduled for Thursday. And this could be the real start of an election year where volatility affects risk assets. Some believe the US dollar could be a winning trade in the months leading up to Election Day. If the greenback continues its already impressive pace, investors who want to stay engaged in international stocks could benefit from currency-hedged exchange-traded funds, including the WisdomTree Europe Hedged Equity Fund (HEDJ B) and the WisdomTree Japan Hedged Equity ETF (DXJ B-).
As of Monday, the Deutsche Bank Long USD Currency Portfolio Index, which tracks the dollar against a basket of major currencies, was up 7.4% year to date. This uptrend supports the gains of DXJ and HEDJ. This allows the ETFs to rank among the best performers in the Japan and Europe categories since the start of the year. The same situation could occur if the U.S. currency recovers amid expectations of election-year turmoil.
In a new report, Goldman Sachs analyst Dominic Wilson said the dollar could be a viable option in the near term. Thursday’s presidential debate could be a potential catalyst for the greenback.
“The next presidential debate could pave the way, at least temporarily, for a period of focus on the US elections. And in this context, we continue to favor exposure to the rise of the dollar in the medium term. Which also has the advantage of hedging certain non-US political risks (such as the French elections and the Chinese slowdown),” observed the analyst.
Wilson looked at various scenarios for the dollar against major currencies after the election. He noted that under the influence of a Republican victory, the euro and the yen would likely see a significant decline against the dollar. This could potentially trigger HEDJ and DXJ. He added that if former President Trump won with a divided Congress, these currencies would likely continue to weaken against the dollar. But less than in the GOP sweep scenario.
The Goldman Sachs analyst added that in a Democratic victory situation, the euro and yen could perform modestly against the dollar. And if President Biden is re-elected but faces a divided Congress, the gains for these currencies could be slightly higher. However, it might be worth considering DXK and HEDJ in the short term.
“Although, traditionally, markets often react to US elections only one to two months before the event. We also saw significant changes in electoral probabilities – and in markets – around the presidential debates,” concludes Wilson. “The much earlier debate schedule increases the chances that the market impact will appear earlier than usual, which already justifies the implementation of some election coverage.”
For more news, information and analysis, visit Modern Alpha Channel.
This article was prepared as part of WisdomTree’s paid general sponsorship of VettaFi | ETF Trends. This specific content and any opinions expressed therein belong solely to VettaFi and do not reflect the opinion or analysis of WisdomTree, its employees or its affiliates. Content published on VettaFi | ETF Trends is provided for educational purposes only and should not be considered investment or tax advice. For investment or tax advice, please consult a financial professional.
WisdomTree is an independent company, not affiliated with VettaFi | ETF Trends. WisdomTree was not involved in the preparation of the content provided by VettaFi | ETF Trends. It neither guarantees nor assumes any responsibility for its content.