For example, if an investor has the iShares MSCI Sweden ETF (NYSEArca: EWD) in their portfolio, they have also invested in the Swedish krona relative to the U.S. dollar. Should the krona’s value go up, the returns gained by investors in EWD will be greater than if the krona had depreciated. However, if the local currency of a chosen foreign investment loses value, U.S. investors owning Swedish stocks would take a loss. [ETFs That Hedge Their Foreign Currency Exposure]
There are only a few options for those investors who want to take the currency factor out of foreign investments. ETFs that hedge currency fluctuations is the WisdomTree Japan Hedged Equity ETF (NYSEArca: DXJ) and the WisdomTree Europe Hedged Equity ETF (NYSEArca: HEDJ).
These ETFs use derivatives to take the currency movements out of the returns in the funds, and provide a pure play on the equities, reports Levitt. [Currency Hedged ETF Falls with Japan Stocks, Higher Yen]
Tisha Guerrero contributed to this article.