The currency hedging trade is starting to fade

Kiyoshi Ota | Bloomberg | Getty Images

The trendiest trade of 2015 has lost some of its mojo lately.

With global central banks in overdrive to devalue and the U.S. heading in the opposite direction, investors had been piling into exchange-traded funds that hedged against big currency moves.

Four of the top 10 ETFs this year in terms of fund inflows are related to currency hedging. That includes the most popular one, the WisdomTree Europe Hedged Equity, which has taken in $13.6 billion, according to ETF.com. The fund is up a gaudy 16.8 percent year to date but is down 2.5 percent over the past week and off 0.4 percent for the month.

The funds often use a balance of dividend-paying and export-based companies to hedge currency exposure.

Softening economic conditions and the derailing of U.S. dollar strength has turned the tide on the currency hedge play.

During May, currency hedged funds saw their slowest pace of inflows since October, with just $3.4 billion coming into those products, reported BlackRock, which is the biggest player in the ETF industry with $822.2 billion in assets under management. Investor interest grew a bit later in the month when the greenback regained some strength, but likely will wane again now that the dollar is headed weaker.

Central bank positioning will be the key.