With international equities bouncing back, exchange traded fund investors seeking to diversify into overseas markets should also consider the potential currency risks associated with foreign investments.
On the upcoming webcast, Currency – Hedging Matters: Simple ETF Strategies, Robert Bush, ETF Strategist at Deutsche Asset Management, Scott Kubie, Chief Investment Strategistat CLS Investments, and Kize Behrends, ETF RVP at Deutsche Asset Management, will help explain the benefits of currency hedging in an international investment portfolio and ways to implement a currency hedged strategy.
Investors would typically want to hedge their international investments if overseas currencies depreciate against the U.S. dollar – a weak foreign currency means that returns are lowered when converted back into USD terms. Consequently, through a currency hedged strategy, investors will be better able to capitalize on overseas market moves, without worrying about currency depreciation.
Overseas investments have gained popularity in recent years as global central banks enacted loose monetary policies to promote economic growth. However, the accommodative central bank measures would depreciate their respective currencies. Consequently, many investors have turned to currency-hedged ETFs to capture the growth and protect themselves against the foreign exchange risks.
For instance, the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF), which tracks developed Europe, Australasia and Far East countries, was one of the most popular ETFs last year as investors used the diversified currency-hedged ETF to tap into overseas growth and hedge against weakening currencies. DBEF includes country exposure to japan 22.6%, U.K. 19.4%, France 9.8%, Switzerland 9.2%, Germany 9.1%, Australia 7.2%, Hong Kong 3.2%, Spain 3.1%, Netherlands 3.1% and Sweden 2.9%.
There are also a number of currency-hedged ETFs that provide more targeted exposure. For example, the Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU) is targets European markets, including U.K. 30.0%, France 15.1%, Switzerland 14.2%, Germany 14.1%, Spain 4.9%, Netherlands 4.7%, Sweden 4.6%, Italy 3.3%, Denmark 3.1% and Belgium 2.3%.
[related_stories]Additionally, there are currency-hedged country-specific options as well, including the Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP), which focuses on Japan.
However, potential investors should be aware that these currency hedged ETFs may underperform non-hedged ETFs if the foreign currencies begin to appreciate or the U.S. dollar depreciates.
Financial advisors who are interested in learning more about overseas investments and currency risks can register for the Thursday, April 21 webcast here.