Need a Hedging Component in Your International Assets?

One of the challenges with investing overseas is the susceptibility of the local currency of international markets, warranting a dollar-hedging component with exchange traded funds (ETFs) like the IQ 50 Percent Hedged FTSE International ETF (HFXI).

The prevailing sentiment in the capital markets is that an improving economy will eventually cause the U.S. Federal Reserve to shift its interest rate policy. Rising rates typically strengthen the dollar, causing foreign investors to ditch their local currencies in favor of dollar-denominated assets with higher yields.

As noted in an Investopedia article, “a weakening currency can drag down positive returns or exacerbate negative returns in an investment portfolio. For example, Canadian investors who were invested in the S&P 500 from January 2000 to May 2009 had returns of -44.1% in Canadian dollar terms (compared with returns for -26% for the S&P 500 in U.S. dollar terms), because they were holding assets in a depreciating currency (the U.S. dollar, in this case).”

The fund seeks investment results that track, before fees and expenses, the price and yield performance of the FTSE Developed ex North America 50% hedged to USD Index. The FTSE Developed ex North America 50% Hedged to USD Index is an equity benchmark of international stocks, with approximately half of its currency exposure of the securities included in the index “hedged” against the U.S. dollar on a monthly basis.

HFXI includes stocks from Europe, Australasia and the Far East in developed market countries. Includes primarily large- and mid-capitalization companies. Overall, the fund boasts:

  1. Passive International Exposure: Employs a truly passive, simpler approach to international equity investing for broad developed market exposure.
  2. Currency Neutrality: A 50% currency hedge mitigates the volatility associated with fully hedged or unhedged strategies, and eliminates the need to make a currency bet.
  3. Potential as a Core International Holding: Use as a low-cost, tax-efficient alternative to actively-managed international equity strategies.

HFXI Chart

Strong Dollar Highlights Need for Hedging

There’s already early signs of a strengthening dollar in this week’s trading session. Per a CNBC report, “gold dropped on Tuesday as a firmer dollar countered a slip in U.S. Treasury yields as investors looked ahead to U.S. inflation data that could influence the Federal Reserve’s timeline to taper monetary support.”

“It’s a tug of war between bulls and bears (for gold) at the 1,900 level,” said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

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