A big story of the last two years has been the strength of the U.S. dollar and the change in central bank policy prescriptions that led to it. This move has caused strong reverberations across foreign stock funds that are exposed to foreign currency risk.
When allocating to foreign stocks, investors typically must take on currency risk in addition to the local equity exposure. Recently, the by-product of this “currency bet” has detracted from the performance of traditional international funds—the vast majority of which do not hedge currencies. To address this, WisdomTree launched a broad-based international currency-hedged strategy in 2014 that gives exposure across the major developed world countries but hedges out the currency impact. That hedge is leading to dramatic performance differentials versus the large category of foreign open-ended funds and exchange-traded funds (ETFs).
How Strong Are Currency Headwinds?
There are more than 1,500 open-ended funds and ETFs in the foreign large-cap, large value and large-cap growth categories, according to Morningstar. Below we showcase how the WisdomTree International Hedged Dividend Growth Fund (IHDG) has beaten 97% of its 1,515 peers since its inception. We contrast this with the MSCI EAFE Index and the FTSE Developed ex North American Index, which have only beaten 45% and 47% of this peer group, respectively. Both of these indexes have exposure to foreign currency risk, which shows how dramatic currency headwind can be.
The strong relative returns of IHDG versus the peer group show how currency has become a prime driver of relative performance when investing internationally.1
IHDG Beats 97% of Foreign Large-Cap Funds
Percentage of Peers Beaten in MorningStar Category as of December 31, 2014
Average Annual Returns as of 12/31/2014
Portfolio Characteristics of IHDG