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
For instance, the iShares MSCI EMU ETF (NYSEArca: EZU) and SPDR EURO STOXX 50 (NYSEArca: FEZ) have increased 1.9% and 2.0%, respectively, over the past month.
Meanwhile, investors who believed the euro currency could weaken after its recent rally and are bullish on the broader Eurozone turned to the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ), iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ). Over the past month, DBEZ rose 2.6%, HEZU gained 2.7% and HEDJ increased 2.8%.
The non-hedged iShares MSCI Japan ETF (NYSEArca: EWJ) was up 4.0% over the past month.
On the other hand, the depreciating JPY has allowed currency-hedged Japan ETFs to outperform their non-hedged peers. For instance, the WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ), iShares Currency Hedged MSCI Japan ETF (NYSEArca: HEWJ) and Deutsche X-trackers MSCI Japan Hedged Equity ETF (NYSEArca: DBJP) have been go-to options to access Japanese equities markets while hedging against foreign exchange risks. Over the past month, DXJ, HEWJ and DBJP all advanced 5.3%.
For more information on currency hedging strategies, visit our currency hedged ETFs category.