What is HFXI? (Pros, Cons, and Strategies)

If you're considering international diversification for your investment portfolio without the complexities of currency fluctuations, HFXI could be a prudent choice. Many investors turn to ETFs like HFXI (IQ FTSE International Equity Currency Neutral ETF) for global exposure while mitigating foreign exchange risk. In this post, we'll delve into what HFXI is, explore its advantages and disadvantages, and discuss various investment strategies.

What is HFXI?

HFXI stands for IQ FTSE International Equity Currency Neutral ETF, an ETF designed to provide exposure to international equities while neutralizing currency risk.

HFXI tracks the FTSE Developed ex North America 50% hedged to USD Index, which includes large and mid-capitalization companies from developed markets outside North America, with a specific 50% currency hedging strategy to minimize exposure to exchange rate fluctuations.

Unlike traditional international ETFs that leave investors vulnerable to currency movements, HFXI's strategy involves hedging half of the portfolio against the U.S. dollar. This semi-hedged approach aims to reduce volatility caused by currency changes while retaining the benefits of international exposure.

Key Features of HFXI

• Focus on Developed Markets: Invests in large and mid-cap companies from developed regions, excluding North America.
• Currency Hedging: Employs a 50% hedging strategy against the U.S. dollar to mitigate currency risks.
• Broad Diversification: Exposure to a wide array of industries and sectors across multiple countries, enhancing diversification.

After selecting the stocks, the hedging component is applied to reduce the impact of currency volatility while still offering the growth potential of international equities.

HFXI Composition

HFXI comprises companies from diverse industries in developed markets such as Europe, Asia, and Australia. Some well-known holdings include Nestle (NESN), Toyota (7203), and HSBC Holdings (HSBA). With a blend of various sectors, such as consumer goods, financials, and industrials, HFXI provides broad international exposure while minimizing the effects of currency fluctuations.

Pros of HFXI

Currency Risk Mitigation

The primary advantage of HFXI is its 50% currency hedging strategy, which reduces the exchange rate risk that often comes with international investing. By neutralizing half of the currency exposure, HFXI aims to strike a balance between full currency hedging and no hedging, resulting in lower volatility and more predictable returns.

Diversification

HFXI allows investors to access a wide range of companies across multiple developed markets, thus enhancing portfolio diversification. This international exposure can reduce the concentration risk associated with domestic investments.

Stability

Investing in companies from well-established economies provides a degree of stability. Companies in developed markets typically exhibit lower risk compared to those in emerging markets, which aligns well with HFXI's goal of providing stable returns.

Relatively Low Expense Ratio

When it comes to ETFs, cost efficiency is pivotal. HFXI boasts a relatively low expense ratio, making it a cost-effective choice for obtaining international exposure with currency hedging.

Cons of HFXI

Moderate Dividend Yield

While HFXI offers diversification and stability, its dividend yield may not be as attractive as those of some high-yield international ETFs. Investors seeking significant dividend income might find HFXI's returns modest.

Limited Growth Potential

Focusing on developed international markets might result in slower growth compared to ETFs that invest in emerging markets, where there's a higher potential for rapid economic expansion.

Complexity of Currency Hedging

Although the 50% currency hedging strategy mitigates currency risk, it also introduces an additional layer of complexity. Smaller movements in currency markets might still impact returns, and the cost of hedging could slightly drag on performance.

HFXI Investment Strategies

HFXI can be a valuable component of a diversified portfolio, particularly for investors seeking international exposure without full currency risk. Here are several strategies to consider:

Long-term International Exposure

If you aim to diversify your portfolio with international stocks but want to avoid the full brunt of currency risk, HFXI is a solid long-term investment. Its 50% hedging strategy makes it suitable for investors who are looking for balance between risk and return.

Complementing a U.S.-Centric Portfolio

For investors heavily weighted in U.S. equities, adding HFXI can provide geographical diversification. This strategy helps distribute risk across various markets and can potentially smooth out returns over time.

Pairing with Emerging Market Investments

To capture the potential high-growth of emerging markets while balancing risk, you can pair HFXI with an emerging markets ETF. This combination offers both stability from developed markets and growth opportunities from developing economies.

Retirement Planning

Given its relatively low expense ratio and focus on developed markets with reduced currency risk, HFXI can be an effective tool for long-term retirement planning. By investing consistently over time, you can leverage the power of international diversification and stable returns.

Conclusion

HFXI presents a unique approach to international investing by balancing the benefits of global exposure with the stability of reduced currency risk. While it might not provide the highest dividend yields or the swiftest growth, its 50% currency hedging strategy and diversified portfolio make it a compelling choice for investors seeking stable, long-term international exposure. Always consider your investment goals, risk tolerance, and time horizon when deciding if HFXI aligns with your overall portfolio strategy.