Volatile exchange rates
During my trip, whenever I visited an ATM, I could see firsthand just how volatile exchange rates can be. While I withdrew the same amount consistently, the withdrawal cost me less and less in dollar terms as the euro dropped 2.4 percent over the course of my stay, including a 2 percent drop over four days mid-trip, according to Bloomberg data.
Looking forward, currency volatility is only likely to continue, as the Federal Reserve (Fed) and ECB’s monetary policies diverge further and the dollar potentially appreciates vs. the euro. As currency volatility can have a significant impact on the total return of an international investment, thinking about how to potentially insulate a portfolio from such currency ups and downs is more important than ever.
So, while the case for adding exposure to European stocks remains strong, especially with a weakening euro serving as a tailwind for the European economy and European firms, investors seeking to capitalize on this opportunity must contend with fluctuating exchange rates. Exchange traded funds, such as the iShares Currency Hedged MSCI EMU ETF (HEZU) and the iShares Currency Hedged MSCI Germany ETF (HEWG), can provide access to the eurozone market and Germany, respectively, while potentially mitigating exposure to fluctuations between the value of the euro and the U.S. dollar.
Heidi Richardson is a Global Investment Strategist at BlackRock. She is also Head of Investment Strategy for U.S. iShares.