A Currency Neutral ETF Approach to International Markets

As the rally in U.S. equities grows long in the tooth, many are looking to international markets to find opportunities. Looking at the various options available, investors may want to consider a currency-hedged exchange traded option to gain overseas exposure.

For instance, the IQ 50 Percent Hedged FTSE International ETF (NYSEArca: HFXI) and IQ 50 Percent Hedged FTSE Europe ETF (NYSEArca: HFXE) are two options that have been outperforming. Year-to-date, HFXI gained 6.7% and HFXE rose 6.2%. In contrast, the S&P 500 was up 5.3% so far this year.

With the 50% currency-hedged ETFs, “you don’t have to make a currency call (fully hedged/unhedged) and are getting international exposure,” Salvatore Bruno, IndexIQ Executive VP & Chief Investment Officer, told ETF Trends.

When gaining overseas exposure, foreign exchange fluctuations are among the largest contributors of portfolio volatility. Consequently, as more investors and advisors look to foreign market exposure to diversify, many are considering the currency risks that come with it.

Looking ahead, the Federal Reserve is embarking on interest rate normalization, has hiked rates for the second time in almost a decade and signaled it may raise rates two more times, which may diminish the supply of greenback and help strengthen the U.S. dollar against foreign currencies. Additionally, President Donald Trump has indicated that he will enact business-friendly policies to help strengthen the U.S. economy, which will also further strengthen the dollar.

On the other hand, foreign central banks are still implementing loose monetary policies, with some even targeting even looser policies, potentially weakening their currencies even further against the greenback.

If investors gain exposure to these foreign markets, investors will be exposed to these weakening foreign currencies and the negative effect once converted back to U.S. dollar-denominated returns on the international investments.