Currency Hedged ETFs Offer a Smoother Long-Term Ride

When investing in overseas markets, investors should consider a currency-hedged international stock exchange traded fund to help diminish volatility associated with foreign exchange risks.

“Since 1978, currencies have increased volatility 91% of the time over five-year rolling periods, contributing 2.7% more volatility on average each year,” Robert Bush, ETF Strategist at Deutsche Asset Management, said on the recent webcast, Currency – Hedging Matters: Simple ETF Strategies.

However, investors can take steps to manage the risks. Scott Kubie, Chief Investment Strategist at CLS Investments, pointed out that hedging currency exposure in international investments has historically lowered risks or volatility associated with fluctuating overseas currencies.

Investors should also note that currencies typically follow ebbs and flows. After years of depreciating against foreign currencies, the U.S. dollar is finally in a bullish cycle. Kize Behrends, ETF RVP at Deutsche Asset Management, pointed out that since 1973, the U.S. dollar cycle has averaged eight years and the current cycle of a stronger U.S. dollar began in 2011.

“While currencies are very challenging to predict on a shorter term basis, we have seen a trend in the U.S. dollar cycle since it became a free-floating currency in 1973,” Behrends said. “Historically, each U.S. dollar cycle, up or down, lasts around eight years, with downward cycles recording possible dollar depreciation up to 50 percentage points. Currently, we are in our fourth year of the current U.S. dollar bull cycle, up 29%, with what we believe is still some room for the U.S. dollar to appreciate.”

Consequently, if the U.S. dollar continues to strengthen, foreign currencies will depreciate, which would weigh on an investor’s overseas investments – a weaker foreign currency means that returns are lowered when converted back into USD terms.