Market observers expect the Bank of England to raise interest rates this week, which could lift the pound, but a stronger currency could weigh on many of the multi-national firms residing in ETFs like EWU.
Related: 6 UK ETFs to Watch as Pound Faces Volatility
Without a hedge against volatility, U.S. investors interested in the growth in U.K. markets would be subject to the wild swings in the pound sterling. Since British stock are denominated in the pound sterling, a weaker GBP would mean that USD-denominated returns would be lower after a depreciating in the pound sterling.
If investors are worried about foreign exchange risks, the currency hedged iShares Currency Hedged MSCI United Kingdom ETF (NYSEArca: HEWU), WisdomTree United Kingdom Hedged Equity Fund (NasdaqGM: DXPS) and Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSEArca: DBUK) outperform non-hedged U.K. exposure during periods of sterling weakness.
For more news and strategy on currency-hedged ETFs, visit our Currency-Hedged category.