It’s quite possible that the S&P 500 Index is the most widely followed benchmark index on earth. Therefore, strategies for constructing portfolios around the S&P 500 that enhance risk/return trade-offs could be of great interest, and this is actually one of the reasons people look at stocks outside the United States.
To Hold or Not to Hold Currency with Foreign Equities?
This is a recent question, given that classic international exposures did not even view this as a choice. Since there were limited, if any, cost-effective means to separate currencies from international equities, many simply held the two in tandem. This has changed with the proliferation of currency-hedged exchange-traded funds (ETFs) in the last four to five years.
One of the common rationales for layering currency risk on top of equities was that holding the currency—itself a source of uncertainty—actually enhanced the risk/return trade-offs of the broader portfolio. Simply put, holding international currency on top of equities is often thought to improve portfolio diversification.
Debunking the Diversification Myth