Figure 2: MSCI EMU Index: Return, Volatility and Correlation
The discussion of currency-hedged strategies has shaken some of the core beliefs of investors. Traditional investment vehicles that package equity risk plus a secondary currency risk on top of the equity risk have been referred to as the traditional “plain vanilla” exposure because they were the first to the market, and it is what investors have been using for so long.
I believe it’s necessary to take a harder look at the diversification attained by adding in this FX risk. If investors evaluated FX as a pure standalone investment instead of a package product, I think they would rarely find themselves convinced of the reason to add in this exposure to their portfolios. There has been rising correlation to the S&P 500, low historical returns to FX, high historical volatility and a tactical environment that looks likely to favor the U.S. dollar.
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1References currency exposure of MSCI EAFE Index.
2WisdomTree, MSCI, 12/31/69–7/31/14. Applies to all bullet points.
3References currency exposure of MSCI EMU Index.
4Sources: WisdomTree, MSCI, 12/31/87–7/31/14. Applies to all bullet points.
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. Past performance is not indicative of future results. Diversification does not eliminate the risk of experiencing investment losses.