While unhedged investors may still benefit from higher returns in some years as the foreign currencies appreciate, an unhedged position will exhibit greater volatility. Alternatively, Behrends argued that hedged investments can provide a smoother long-term investment with less drawdowns to worry about.
“In a traditional portfolio consisting of 30% international stocks, we contrasted allocating to hedged vs. unhedged strategies,” Behrends added. “Over the short term, we found a material difference in overall returns, which diminished over long time horizons. But by minimizing currency exposure with a hedged solution, standard deviation fell consistently over the past 15 years.”
ETF investors who are interested in a currency-hedged international position have a number of options available. For broad exposure, the Deutsche X-trackers MSCI All World ex US Hedged Equity ETF (NYSEArca: DBAW) follows a market cap-weighted index of international stocks, excluding U.S. exposure. The Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF) tracks developed Europe, Australasia and Far East countries. Additionally, the Deutsche X-trackers MSCI Emerging Markets Hedged Equity Fund (NYSEArca: DBEM) targets the emerging markets.
Financial advisors who are interested in learning more about overseas investments and foreign currency risks can watch the webcast here on demand.