While an investor can capture growth in overseas developed markets through an Europe, Australasia and Far East ETF, one will be exposed to currency risks. According to a recent ETF Trends and RIA Database survey, the majority financial advisors expressed concern over European currency weakness.
A weaker foreign currency means that the assets would generate a lower U.S.-dollar-denominated return. Currently, the U.S. dollar is shifting toward a strengthening cycle.
“The dollar has been in a secular decline for more than a decade,” Luke Oliver, head of U.S. ETF Capital Markets at Deutsche Asset & Wealth Management, said. “With the average USD cycle at about eight years and the USD near all-time lows, that tide could shift at any time…. With QE, the dollar has been kept low, but will likely begin to gain more strength and momentum as QE begins to taper.”
Investors who are interested in capturing developed Japan and European markets but are wary also about depreciating foreign currencies can take a look at a hedged EAFE ETF, such as the DeutscheX-trackers MSCI EAFE Hedged Equity Fund (NYSEArca: DBEF). DBEF includes country exposures to Japan 22.4%, U.K. 18.5%, Switzerland 9.7%, France 9.5%, Germany 9.1%, Australia 7.4%, Netherlands 4%, Spain 3.5% and Sweden 3%.
The currency hedge difference has been on full display this year as DBEF has jumped 5% while the unhedged MSCI EAFE Index is lower by 4.7%. That scenario helps explain DBEF’s exponential growth. DBEF entered 2014 with about $313 million in assets under management. Today, the ETF has over $1.2 billion in assets under management. [Falling Currencies Lift This ETF]
Financial advisors who are interested in learning more about a currency-edged developed market strategy can listen to the webcast here on demand.