From this, we see that foreign currencies will likely not add to portfolio returns over the long run, but they may add to risks over the short-term.
“For both developed and emerging markets, equity volatility is the dominant term, and currency volatility is significant and additive to total investment volatility,” the strategists said.
Consequently, if one controls for currency exposure, international investors may be able to diminish risk associated with volatility in the forex market.
“We believe that hedging the currency risk of a portfolio of international equities can be expected to lower portfolio volatility without impacting expected returns,” Deutsche strategists added.
ETF investors interested in the currency-hedged strategy have a number of options available. For instance, Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) and Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ) provide targeted exposure to Japan and the Eurozone, respectively. Additionally, the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF) provides access to the broader developed Europe, Australasia and Far East.