AXA IM has expanded its ETF line-up with a new currency-hedged share class in Mexican pesos, now available on Cboe NL. This newly-listed share class is designed to help investors mitigate the fluctuations of foreign exchange movements on their investments.
Currency hedging aligns with AXA IM’s commitment to enhancing investors’ options, access and liquidity through direct exposure to global markets. AXA IM has developed a specific currency hedging process to optimize the balance between risks and costs for ETF investors, ensuring an optimal approach to global investment opportunities.
This last peso-hedged share class addition to a US-ex-posed ETF is simply listed on Cboe NL.
How does AXA IM minimise its currency risk for clients?
As a global ETF provider, AXA IM deals with a broad range of investors with various needs in terms of investment objectives, exposures and risk appetite. This includes the impact of exchange rates of an ETF’s underlying assets when these are different to the investor’s own preferred currency.
Standard industry models include daily and monthly hedging. Daily hedging requires a daily valuation of the various non-base currencies the share class is exposed to and entering into new derivative trades to correctly match the hedged currency value, and mitigate this risk as closely as possible.
Monthly hedging is quite different and takes a more conservative approach to trading and carries this out once per month. Neither are optimal solutions – daily hedging activity narrows the currency exposure more frequently, and in doing so lessens the potential for large movements in FX and interest rates to impact the Fund, but this comes with a large operational and transaction cost.
Conversely, monthly hedging requires far less trades and therefore less associated costs to be borne by the ETF but increases the risk of significant currency volatility in the interim. AXA IM’s role is to implement a hedging strategy designed to best mitigates currency risk offering currency-hedged share classes while minimising the transaction and operational costs associated with hedging.
This is why we have adopted a dynamic currency hedging model for all UCITS ETFs, that combines both monthly and daily hedging benefits. We recognise that ETF investors require operational costs to be kept to a minimum, and maintain exposure to a return profile that aims to replicate that of the base currency of the ETF as closely as possible.
AXA IM took the decision to balance this need for low cost with accuracy, as well as satisfying regulatory requirements which require reducing the risk that one share class could affect another within the same ETF, with various share classes and listings in parallel.
The dynamic currency hedging model
Rather than rely on static hedging models, based on set intervals, AXA IM employs a dynamic approach for currency-hedged ETF share classes. AXA IM applies a series of monitoring criteria to the value of the reference portfolio.
When this either rises or falls outside of a pre-set ratio, the currency hedges are adjusted as needed to bring the hedged currency value back in line*. This enables investors to choose from a more convenient range of currencies to invest in, whilst lessening the exposure to FX fluctuations during the lifespan of their investment.
Rather than wait for pre-set times at which to roll over the hedging transactions and realise any currency-related profit or loss that has accumulated over time for the hedged share class, we are able to have greater visibility and control over managing FX volatility and can increase our hedging frequency to more closely follow that of the base currency of the ETF.
Greater control of the hedging process also allows AXA IM to lower the risk of under- or overhedging. Dynamic hedging is designed to ensure tighter tracking and more accurate currency hedging compared to monthly hedging, especially in a volatile environment.
Are charges ring-fenced?
It should be noted, however, that gains, losses and other associated expenses such as transaction costs that arise between a currency differential will be borne by the hedged share class only, and that a hedged share class will not precisely follow the exact return profile of the base currency of the ETF.
It should also be noted that the aim of the hedged share classes to limit and mitigate uncertainty for our investors, and so this process will also naturally limit potential benefits from any favourable currency movements between the hedged share class and the base currency of the ETF.
Nevertheless, this approach can help those investors seeking to lower currency-related volatility over time. Investors in hedged share classes are essentially acquiring exposure to the underlying ETF, plus the FX hedging contracts which are carried out on their behalf.
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full edition, click here.
*Exposure resulting from currency hedging transactions will not be permitted to exceed102% of the net asset value (NAV) of the relevant class and will not be permitted to fall below 98% of the portion of the NAV of the relevant class which is to be hedged against currency risk. All transactions will be clearly attributable to the relevant Class and currency exposures of different classes will not be combined or offset.
For more information on ETFs, including holdings lists, visit your local fund centre available at core.axa-im.com/etf
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