As investors begin to utilize exchange traded funds to diversify away from domestic markets, more are beginning to understand how currency risk can affect equity portfolios.

On the recent webcast, Have You Hedged Your Clients’ Japanese Equity Exposure?, Raman Aylur Subramanian, Managing Director & Head of Index Applied Research for the Americas at MSCI, warned advisors about factors to look out for when investing overseas.

“Increased allocation to foreign equities in U.S. portfolios, leads to a higher exposure to foreign currencies,” Subramanian said.

Consequently, advisors should begin thinking about how to they can hedge their equity positions when investing in overseas markets like Japan, the third largest global economy.

“Hedging can prove vital in managing currency exposure especially if an investor has a bearish view on a currency,” Subramanian said.

The U.S. dollar is beginning to strengthen against other major currencies, and an appreciating dollar would correspond with weakening foreign currencies. Consequently, even if foreign currency-denominated stocks were rising, the increase in the foreign equity positions could translate to lower dollar-denominated returns.

“Time for the dollar to again be the strongest G10 currency for only the 6th time since the fall of Bretton Woods,” Daniel Brehon, FX Strategist at Deutsche Bank, said on the webcast.