With the U.S. dollar rebounding and European markets recovering, exchange traded fund investors may want to consider a currency-hedged strategy to capture the gains while mitigating the negative effects of an appreciating USD.
For example, the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ), the largest Europe currency-hedged ETF, rose 7.6% over the past three months and recently broke above its long-term resistance at the 200-day simple moving average.
Related: Japan, Europe ETFs Climb Above Long-Term Trend
Investors would typically 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.
[related_stories]Currently, investors are watching the Federal Reserve for cues. Fed chair Janet Yellen has said the ongoing improvements in the U.S. economy could warrant another interest rate hike “in the coming months,” reports Christopher Condon for Bloomberg.
“It’s appropriate – and I’ve said this in the past – for the Fed to gradually and cautiously increase our overnight interest rate over time,” Yellen said Friday. “Probably in the coming months such a move would be appropriate.”
Related: International ETFs: Currency Story Hasn’t Changed
If the Fed hikes rates, the exchange value of the U.S. dollar will strengthen, or foreign currencies will depreciate relative to the greenback. Consequently, a non-hedged international investment will experience lower U.S. dollar-denominated returns.
Investors can capture European market returns while hedging against the foreign exchange risks through a number of hedged-equity ETFs.
Europe currency-hedged equity ETFs:
- WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ)
- Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU)
- iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU)
- PowerShares Europe Currency Hedged Low Volatility Portfolio (NYSEArca: FXEU)
- WisdomTree Europe Hedged SmallCap Equity Fund (NYSEArca: EUSC)
- Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ)
- IQ 50 Percent Hedged FTSE Europe ETF (NYSEArca: HFXE)
- First Trust RiverFront Dynamic Europe ETF (NasdaqGM: RFEU)
- JPMorgan Diversified Return Europe Currency Hedged Equity ETF (NYSEArca: JPEH)
- SPDR EURO STOXX 50 Currency Hedged ETF (NYSEArca: HFEZ)
- ProShares Hedged FTSE Europe ETF (NYSEArca: HGEU)
- O’Shares FTSE Europe Quality Dividend Hedged ETF (NYSEArca: OEUH)
- WisdomTree Dynamic Currency Hedged Europe Equity Fund (BATS: DDEZ)
- iShares Edge MSCI Min Vol Europe Currency Hedged ETF (BATS: HEUV)
- Deutsche X-trackers MSCI Eurozone High Dividend Yield Hedged Equity ETF (NYSEArca: HDEZ)
- iShares Adaptive Currency Hedged MSCI Eurozone ETF (BATS: DEZU)
For more information on hedged options, visit our currency hedged ETFs category.