However, potential investors should be aware that mitigating a potential source or risk by hedging currency exposure can also limit a potential source of return if the foreign currencies begin to appreciate against the U.S. dollar. For instance, over the past 40-plus years, Johnson points out that currency returns were a major contributor to total returns in foreign investments.
Nevertheless, investors should keep in mind that currencies follow a cyclical path – if one currency appreciates, another depreciates, and no single currency will appreciate indefinitely.
“By hedging foreign-currency exposure, investors can mitigate a source of risk–at the expense of a potential source of return,” Johnson added. “The trade-off between the two is an important one, and investors’ decisions will depend on a variety of factors, including but not limited to their return requirements, risk tolerance, investment horizon, and the costs associated with hedging currency exposure.”
Financial advisors interested in learning more about investing in the currency-hedged ETFs can register for the upcoming webcast, Have You Hedged Your Global Exposure?, scheduled for February 20.
For more information on investing globally, visit our global ETFs category.