The impact of currency on asset class performance has been historically underappreciated by many investors. For U.S. investors, movements in the U.S. Dollar against foreign currencies has the potential to wipe out or meaningfully enhance gains or losses in foreign currency-denominated assets. Savvy ETF investors can now choose to hedge their currency exposure if the U.S. Dollar strengthens, or chose to leave their investments unhedged if they believe that the foreign currency will strengthen against the Dollar. The ability to be currency hedged or unhedged exists in broad equity markets or in individual countries. This hedging ability also exists in global fixed income markets.
Recent years have witnessed the emergence of a powerful, new investment tool—the ability to invest in specific factors such as Low Volatility, High Quality, High Dividends, and Momentum. This includes an array of weighting strategies, including equal weighting or fundamentally weighting. Each factor exhibits interesting risk and return characteristics on their own, and their performance may vary dramatically over the course of a year. We believe it is increasingly powerful to combine factors or to even rotate between factors. In our view, Factor Rotation will become one of the most attractive “investment reefs” that demand extensive exploration.
This is not a time to lazily fall asleep above water on your investment boat. The real opportunity and action is going on beneath the investment surface. Not every location under water offers the same beauty, but attractive investment opportunities exist if you know where to look. It’s time to dive in and start exploring.