(Bloomberg) -- The Federal Reserve’s first interest-rate increase in almost a decade can’t come soon enough for ETF providers such as WisdomTree Investments.
Higher borrowing costs will renew a rally by the U.S. dollar, tempting investors back into funds that protect against currency risk after these products attracted the least cash in more than a year, according to Luciano Siracusano, chief investment strategist at the company.
“That could be the next driver that pushes people into more currency-hedged positions,” Siracusano said on the sidelines of a Morningstar ETF conference in Chicago. “The other question is does anything happen in Europe or Japan where those central banks accelerate the pace of their money printing.”
Currency-hedged ETFs, which have absorbed almost $47 billion this year, have lost some of their luster in recent weeks, as dollar strength that had fueled demand for these products eased. Hedges -- which protect capital if a currency declines versus the dollar -- also remove the return-boosting effect of any gain by that currency. That’s damped returns and encouraged investors to shun the products when buying overseas assets.
The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 of its major peers, fell in August and added less than 1% in September.
A Fed’s rate increase, which Siracusano expects in December, will also boost volatility, he said. That will again encourage investors to buy hedged ETFs, he said.
“The volatility that gets unleashed by going from zero to 1% can ripple through different asset classes, particularly if the second or third rate hike happens faster than people expect,” he said.