In a recent episode of Behind the Ticker, Dan Petersen, Head of Product Management at New York Life Investments, discussed the firm’s international equity strategy and the mechanics behind the NYLI FTSE International Equity Currency Neutral ETF (ticker: HFXI). With over two decades in the industry, Petersen has held various roles in financial advisory and ETF distribution, playing a key role in the growth of IndexIQ before its acquisition by New York Life in 2015. Since then, he has focused on product development, helping expand the firm’s ETF offerings.
About Dan Petersen and New York Life
HFXI was designed to provide a balanced approach to international investing by hedging 50% of currency exposure while maintaining full equity market exposure. Petersen explained that historically, investors in international equities had to accept full currency exposure by default, which could add or detract significantly from returns depending on currency fluctuations. Fully hedged products emerged to remove this risk entirely, but many investors found it difficult to time when to hedge and when not to. HFXI was created to offer a middle ground—allowing investors to benefit from currency movements when favorable while reducing the risk of extreme fluctuations.
Investment Strategy and Approach
The fund achieves this partial hedge by using forward contracts that are rolled monthly, adjusting for changes in currency valuations. Petersen highlighted that currency exposure can have a substantial impact on performance, often contributing or detracting by as much as 600 to 1,000 basis points annually. By hedging half the exposure, HFXI aims to smooth out volatility while still allowing investors to participate in foreign currency strength when it occurs. This strategy is particularly beneficial in periods of global economic stability when foreign currencies tend to appreciate, as well as in risk-off environments where excessive currency exposure can compound equity drawdowns.
Petersen positioned HFXI as a long-term core allocation within international equity portfolios. Advisors can use it as a standalone replacement for unhedged international ETFs or pair it with traditional market-cap-weighted international funds to create a customized level of currency exposure. He also pointed out that international equities currently present a compelling valuation opportunity, with price-to-earnings ratios at historically attractive discounts compared to U.S. markets. Given the extreme valuation gap between U.S. and international stocks, he suggested that now may be an opportune time for investors to consider increasing international exposure.
Deeper Dive: Insights from the Full Conversation
Beyond the headline strategy, the full conversation between Brad and Dan Petersen covered several additional themes worth highlighting for advisors and investors.
On Process and Philosophy
There is a slightly positive correlation, but it is a separate distinct time series return because there are times where currencies correlate and times of currencies don't correlate but by and large when I reduce currency exposure in the portfolio it takes away volatility. So we look at this as a way to pair with active in order to lower your volatility and maybe come closer to a benchmark exposure, but maintain your active exposure as well. As a as a satellite or you know to whatever extent you want to maintain active and and definitely as a passive substitute and portfolios for international just again have maintaining your market cap weighted equity not tinkering with your equity waiting.
Really, there wasn't a decision. If you were to go back if 20 years or so, you pretty much as accepted currency risk for what it was. And whether that helped or hurt, you understood that that was part of the attribution to the return. And then fully hedge products started to come out to. Deliver the option that you had the chance now to remove currency risk from the equation and just focus it on the equity exposure. And when those first came out, there was a lot going on in Japan to intentionally devalue the yen spur exports, the title that albidom expected.
Market Context and Positioning
When I look back at performance, I see what has done well. But if currencies mean revert, I might not want to do what has done well. And it gets into a very deep rabbit hole of decision making that is impacted by just a tremendous number of different possibilities, whether it be interest rates, geopolitical risks and things in that nature. Trying to provide almost the most passive approach which is market cap waiting and having the currency exposure.
You know there are smart beta strategies and other ways to approach international to try to reduce volatility. But many times we find that sacrifice returns as well, so this is a way that you don't give up any equity exposure whatsoever, but you're able to reduce your volatility through currency reduction.
And in our conversations for those that were around for that, we find that most people just do not want to do anything in terms of making a decision to have, to have not currency and they just go to default option. If you look at indices, all indices are US dollar based. So when you're benchmarking, you generally have the impact of currencies reflected in the benchmarks as well. We're trying to deliver an option here that lets people understand that there is a neutral way to do this to have some currency exposure.
Notable Insights
"So why don't you start by giving us an overview and what makes this, you know, really unique product in the international equity space."
"So the instrument allows you to settle on the difference in the currencies from the beginning and month to the end of the month."
Key Takeaways
- With over two decades in the industry, Petersen has held various roles in financial advisory and ETF distribution, playing a key role in the growth of IndexIQ before its acquisition by New York Life in 2015.
- HFXI was designed to provide a balanced approach to international investing by hedging 50% of currency exposure while maintaining full equity market exposure.
- By hedging half the exposure, HFXI aims to smooth out volatility while still allowing investors to participate in foreign currency strength when it occurs.
- Petersen positioned HFXI as a long-term core allocation within international equity portfolios.
What This Means for Advisors
For financial advisors evaluating options for client portfolios, this conversation with Dan Petersen highlights important considerations around portfolio construction. Understanding the strategy behind each fund—not just the ticker—helps advisors make more informed allocation decisions and better communicate the rationale to clients.
The themes of portfolio construction and international markets discussed in this episode are particularly relevant in the current market environment, where advisors are increasingly looking for differentiated solutions that go beyond traditional benchmarks.
Listen to the Full Episode
This article is based on an episode of Behind the Ticker, hosted by Brad Roth, Founder and CIO of THOR Financial Technologies. For the full conversation with Dan Petersen, including additional nuances and details, listen on Spotify, Apple Podcasts, or watch on YouTube.