A Dynamic Way to Hedge International Currency Risk | ETF Trends

The U.S. dollar slumped to lowest levels since July last week, but even with two interest rate cuts by the Federal Reserve, the greenback has been strong this year. That strength has provided an assist to the WisdomTree Dynamic Currency Hedged International Equity Fund (CBOE: DDWM).

Unlike other popular currency-hedged ETF offerings with a static foreign exchange hedge, the Dynamic Currency Hedged Equity Fund will hedge currency fluctuations in the relative value of the foreign currencies against the USD, ranging from a 0% to 100% hedge based on interest rate differentials, valuations and relative price momentum of the foreign currencies compared to the USD. This may help the so-called dynamic currency-hedged ETF adjust to changes in the dollar ahead.

DDWM is up more than 12% year-to-date. More importantly, the fund has been a steady performer since its inception in 2016.

“Since its inception and during a strong-dollar environment, DDWM’s dynamic currency hedge has added 92 basis points (bps) and 544 bps of excess returns over a half-hedged and unhedged portfolio, respectively,” said WisdomTree in a recent note.

DDWM Benefits

Even in less volatile periods, correctly predicting the direction the dollar will move against major international currencies is not an easy feat to accomplish. As we continue to digest the diverging global central bank policies and rising uncertainty, international stock investors may want to take a more neutral forex view instead of trying to bet on a definitive up or downtrend in the currency market.

Over the long-term, there are benefits to owning a fund like DDWM and data confirm as much.

“History shows currency exposure has increased the volatility of broad-based international equity portfolios over long periods, and without adding to expected returns. In the chart below we can see that in the last 20 years, currency exposure has added volatility on top of a fully hedged exposure in the developed international equity market,” according to WisdomTree.

Related: Consider a Currency-Hedged ETF Strategy for International Exposure 

A fully hedged portfolio position has historically diminished returns when the U.S. dollar depreciated or international currencies strengthened. Since a hedged portfolio shorts foreign currencies, investors would miss out on the added boost if international currencies appreciated.

“Currency exposure may have added to backward-looking returns over some periods, but there is no reason to believe foreign currencies will always rise going forward. That is one reason WisdomTree believes currency exposure offers uncompensated risk in the long term,” according to the issuer.

For more news and strategy on the Currency ETF market, visit our Currency category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.