Simplifying access to ETFs through dynamic currency hedging

European ETFs require sophisticated currency hedging

Currency-hedged ETFs

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

Key risks: The list below of risk factors is not exhaustive. Please refer to the prospectus for full product details and complete information on the risks.

Equity Risk: The value of shares in which a Fund invests fluctuate pursuant to market expectations. The value of such shares will go up and down and equity markets have historically been more volatile than fixed interest markets. Should the price of shares in which the Fund has invested fall, the Net Asset Value of the Fund will also fall. Funds investing in shares are generally more volatile than funds investing in bonds or a combination of shares and bonds, but may also achieve greater returns.

Capital Loss: An investment in a Fund involves investment risks, including possible loss of the amount invested. Investors may lose part of or entirely the invested capital depending on market conditions.Index tracking risk: there is no guarantee that the Fund will achieve perfect tracking and it may potentially be subject to tracking error risk, which is the risk that its returns may not track exactly those of its Index, from time to time

Impact of any techniques such as derivatives: Certain management strategies involve specific risks, such as liquidity risk,credit risk, counterparty risk, legal risk, valuation risk, operational risk and risks related to the underlying assets. The use of such strategies may also involve leverage, which may increase the effect of market movements on the Fund and may result in significant risk of losses.

Sustainability risks: The Fund does not integrate sustainability risks. Taking into account the investment objective and strategy of the Fund, the Investment Manager does not consider the principal adverse impacts in its investment decisions since it does not intend to promote environmental or social characteristics nor to have a sustainable investment objective. In addition, the principal adverse impacts are not considered as the Fund’s strategy consists in tracking its reference Index.For all clients, on the secondary market:

• Transaction costs occur when purchasing/selling ETF shares on the market and may be subject to broker fees and/or other charges. Only Authorized participants can deal directly with the Fund.

For Authorized Participants (AP), on the primary market:

• Redemption Fee : Up to 3%.

• Subscription Fee : Up to 3%.

This is the maximum that might be taken out of your money be-fore it is invested. Entry and exit charges are not applicable to investors buying/selling shares of the Fund on stock exchanges, but these investors will do so at market prices and may be subject to broker fees and/or other charges

Charges taken from the Fund under specific conditions

• Performance Fees – None Minimum initial and subsequent subscription

• Minimum initial subscription 1 share on secondary market -150 000 for the AP

• Subsequent subscription 1 share on secondary market - 150000 for the AP

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This material does not contain sufficient information to support an investment decision. Due to its simplification, this document is partial and opinions, estimates an forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass.Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this materialis at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.Before making an investment, investors should read the relevant Prospectus and the Key Investor Information Document /scheme documents, which provide full product details including investment charges and risks. The information contained herein is not a substitute for those documents or for professional external advice. The products or strategies discussed in this document may not be registered nor available in your jurisdiction.

Please check the countries of registration with the asset manager, or on the local web sites https://www.axa-im.com/en/ , where the funds and share classes published are filtered according to country of registration and investors’ pro-file. In particular, units of the funds may not be offered, sold or delivered to U.S. Persons within the meaning of Regulation S of the U.S. Securities Act of 1933. The tax treatment relating to the holding, acquisition or disposal of shares or units in the fund depends on each investor’s tax status or treatment and may be subject to change. Any potential investor is strongly encouraged to seek advice from its own tax advisors. For more information on sustainability-related aspects please visit: https://www.axa-im.com/what-is-sfdr

UCITS ETF’s units / shares purchased on the secondary market cannot usually be sold directly back UCITS ETF. Investors must buy and sell units / shares on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units / shares and may receive less than the current net asset value when selling them.For investors located in the European Union:Please note that the management company reserves the right,at any time, to no longer market the product(s) mentioned in this communication in the European Union by filing a notification to its supervision authority, in accordance with European pass-port rules. In the event of dissatisfaction with AXA Investment Managers products or services, you have the right to make a complaint, either with the marketer or directly with the management company (more information on AXA IM complaints policy is available in English:https://www.axa-im.com/important-in-formation/comments-and-complaints ). If you reside in one of the European Union countries, you also have the right to take legal or extra-judicial action at any time. The European online dispute resolution platform allows you to submit a complaint form (available at: https://ec.europa.eu/consumers/odr/main/index.cfm?event=main.home.chooseLanguage) and provides you with information on available means of redress (availableat:https://ec.europa.eu/consumers/odr/main/?event=main.adr.show2). Summary of investor rights in English is available on AXA IM websitehttps://www.axa-im.com/important-information/summary-investor-rights. Translations into other languages are available on local AXA IM entities’ websites.Past performance is not a guide to current or future performance, and any performance or return data displayed does not take into account commissions and costs incurred when issuing or redeeming units. References to league tables and awards are not an indicator of future performance or places in league tables or awards and should not be construed as an endorsement of any AXA IM company or their products or services. Please refer to the websites of the sponsors/issuers for information regarding the criteria on which the awards/ratings are based. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment. Due to this and the initial charge that is usually made, an investment is not usually suitable as a short-term holding.

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