As USD Strengthens, Currency Hedged ETFs Require a Second Look

Many have looked into international markets during a prolonged U.S. rally that stretched valuations at home. With the U.S. dollar beginning to strengthen against its peers, investors should reconsider currency hedged ETFs to limit potential foreign exchange risks.

Over the past month, the U.S. Dollar Index (DXY), which tracks the USD against a basket of major developed foreign currencies, has gained 1.4%. Meanwhile, the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), tracks movements against a basket of currencies including euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, has gained 0.8% over the past month after falling off 8.6% year-to-date.

The U.S. dollar is strengthening on a number of factors. For instance, the U.S. index of business conditions rose to a three-year high, adding to the improving U.S. economic outlook. Furthermore, Federal Reserve Chair Janet Yellen reaffirmed the central bank’s commitment to hiking rates, despite disappointing inflation results.

“The market has already priced in a lot of the good news for the dollar in the last month,” Mark McCormick, North American head of FX strategy at TD Securities, told the Wall Street Journal.

Consequently, investors who are seeking international market exposure may have noticed that currency hedged ETFs are beginning to outperform non-hedged funds as the USD strengthened.

Related: Euro ETFs Continue Defying Skeptics