Despite adding significantly to the volatility picture, historically, the euro’s returns have hardly compensated the investor for the additional volatility. The euro returned2:
+ 5.3% over 1 year
– 1.0% per year over 3 years
+ 1.4% per year over 5 years
+ 1.7% per year over 10 years
The decline in return over the five years more than wiped out any equity gains over that period.
We make the case for hedging out euro exposure in order to potentially reduce overall volatility and mitigate the risk of hurting the overall return profile through potentially adverse currency movements.
Conclusion
While we made the case here with respect to Germany, we also could broaden the argument with respect to the Eurozone at large. WisdomTree believes there is an increased need to consider hedging currency risks when it comes to international investing. WisdomTree has thus created a series of hedged equity Indexes that include one for the broader European markets as well as for some of the largest countries in Europe, such as Germany and the United Kingdom.
1Sources: WisdomTree, MSCI.
2Sources: WisdomTree, MSCI, Bloomberg.
Important Risks Related to this Article
Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty.
Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations.
Derivative investments can be volatile and these investments may be less liquid than other securities, and more sensitive to the effect of varied economic conditions.
Investments focused in Germany are increasing the impact of events and developments associated with the region, which can adversely affect performance.