“Under these assumptions it would be better to hedge,” Woodham and Bush said.
On the flip side, the strategists argued that correlation of -0.3 or lower with volatilities of 2% to 3% need to exist for a currency to be negligible for an international equity position. However, the Deutsche strategists contend that these levels of low dispersion have not been seen historically on a consistent basis, so international investors will experience the negative effects of currency risks.
Consequently, investors who are worried about the risks associated with wide currency swings in their international equity exposure, especially in the upcoming period of diverging monetary policies among global central banks, or Fed tightening and loose policies overseas, should consider currency-hedged ETF strategies to limit the currency risks.
For example, the Deutsche X-trackers MSCI All World ex US Hedged Equity ETF (NYSEArca: DBAW) provides broad market exposure by following a market cap-weighted index of international stocks, excluding U.S. exposure and hedging against depreciation in the underlying currencies against the U.S. dollar. The Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF) tracks developed Europe, Australasia and Far East countries. Additionally, the Deutsche X-trackers MSCI Emerging Markets Hedged Equity Fund (NYSEArca: DBEM) targets the emerging markets.
ETF investors can also find more targeted exposure through specific options. 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.
For more information on the currency hedging strategy, visit our currency-hedged ETFs category.