When tackling anything new, people tend to show some reservations. The same may be said about currency hedged exchange traded fund strategies but the investment may help investors diversify a portfolio.
According to a recent Deutsche Asset & Wealth Management research note, there are a number of common concerns that investors sometimes voice around currency hedging, including: Do I need to currency hedge when investing in companies with a global footprint? If I currency hedge, am I betting on currency moves? Will an American Depository Receipt (ADR) protect me from currency fluctuations? Is currency Hedging expensive?
For starters, currency hedging may be beneficial for an investment in a global company, DeAWM strategists said. For instance, German companies generate 75% of their revenue abroad. Almost a third of revenue generated by Anheuser-Busch Inbev was booked in U.S. dollars and only 6.6% was in euros.
Moreover, currency exposure at the corporate level can affect earnings and stock prices.
“Companies that operate globally tend to have more complex exposure to foreign currencies. Most large companies generate revenue and incur costs beyond the borders of their nation of domicile,” according to DeAWM.
While large companies may hedge currencies at the corporate level, the hedging tools that companies utilize do not diminish the impact of currency on an investor’s risk and return. Specifically, investors who did not hedge the currency exposure of a foreign investment would have found their returns reduced by a stronger U.S. dollar or weaker foreign currency.