Global stocks remain important portfolio components, but investors face currency risks. Fortunately, there are a number of hedged-equity exchange traded funds now available that help diminish the negative effects of a weaker foreign currency.
On a recent webcast, Currency-Hedged ETFs: Damping Currency Volatility With Equity Upside, Jeremy Schwartz, Director of Research at WisdomTree Asset Management, argues that investors can take better control of exposure to international investments through ETFs that implement a currency hedge.
‘We believe that currency hedging in the developed international equity space will be one of the most important portfolio considerations over the next three to five years,” Schwartz said on the webcast.
Looking at historical trends, currencies from EAFE countries, developed economies outside of the U.S. and Canada, have exhibited a cyclical trend that averages 8 years. In the current leg, the U.S. dollar has been weakening while EAFE currencies have strengthened from June 2002 through Feb. 2014, according to MSCI data, and the trend could reverse. Schwartz also points out that EAFE markets have outperformed on average during times of foreign currency weakness.
“Macroeconomic policies – such as those being utilized currently within Japan and those being discussed in Europe – could lead to a potentially weaker euro or yen relative to the U.S. dollar,” Schwartz said.
While the Bank of Japan and European Central Bank are pushing for loose monetary policies, the U.S. is beginning to shift gears. Consequently, Fed action could strengthen the U.S. dollar in a time when the BOJ and ECB are actively trying to depreciate their currencies.
“The U.S. Federal Resreve may be the first to stop its practices of Quantitative Easing, relative to other Developed Market Central Banks, leading to the potential for a stronger U.S. dollar and weaker foreign currencies,” Schwartz added.
Investors who are interested in international exposure but wary of potential currency risks can take a look at the recently launched WisdomTree International Hedged Dividend Growth Fund (NYSEArca: IHDG), which tracks developed markets like the U.K., Switzerland, Australia, Germany, Japan, Sweden, France, Spain, Netherlands and Norway, among others. [Between the Hedges With Global Dividend Stocks]
WisdomTree also offers a suite of sector and broad Japan hedged-equity ETFs, including the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), the largest currency-hedged option. [Positive Technical Signs for Big Japan ETF]
With the ECB meeting just right around the corner, more investors have been looking into Europe-hedged ETFs, like the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ). In a survey of financial advisors conducted by RIA Database and ETF Trends, 46% of respondents say they are interested in a Europe-hedged position but are still researching the market and 24% are overweight Europe. [ETF Signs Mount Traders are Expecting ECB Easing]
For more information on international markets, visit our global ETFs category.
A replay of the webcast will be available here.