The Federal Reserve raised the interest rates by another 25 basis points on Wednesday, which should put a damper on gains for international markets with a stronger dollar, but that shouldn’t discourage investors from allocating capital overseas. Moreover, if an investor does decide to invest internationally, he or she should be aware of the currency risks associated with these investments and consider the necessary factors to hedge appropriately.
“It’s a trade that America isn’t fundamentally really doing,” said Rob Bush, Head of U.S. Product Strategy at DWS Group.
Investing overseas without currency hedging would be akin to flying blind. International markets correlate with the movement of their respective currency, but investors may not be aware of the associated risks.
“You’ve got this enormous potential out there to convince people that they should be thinking more about the currency in their portfolio and the role that it plays,” said Bush.
The 2 Rs and 2 Cs
Bush cites return, risk, correlation and cost as the four factors to consider when it comes to currency hedging. As mentioned, market movements in international equities can correspond directly with the local currencies.
“You actually have to think about risk that currencies bring to the portfolio,” said Bush. “To do that properly, you have to think bout the correlation between currencies and equities.”
A stronger dollar has certainly tamped down demand for international and emerging markets in 2018, but a more dovish-sounding Federal Reserve could awaken these opportunities abroad. Bush cites the worst thing an investor can do is stay un-invested.
“People find reasons not to invest and that’s a problem,” said Bush.
Furthermore, it would be wise for investors to also filter out the noise regarding trade wars or other negative news.
“If you follow the news slavishly, you’re actually going to end up hiding under your bed instead of allocating internationally,” said Bush.
Investors can take advantage of DWS Products with currency hedging built in to allay any fears of investing internationally. Click here for a list of DWS Group’s 12 ETF offerings that feature currency hedging.
Interest Rate Hedging Options
In addition to currency hedging products, the latest rate hike by the Federal Reserve makes the case for investors to consider the Xtrackers Investment Grade Bond Interest Rate Hedged ETF (BATS: IGIH). IGIH seeks investment results that track the performance of the Solactive Investment Grade Bond – Interest Rate Hedged Index where a portion IGIH’s total assets will reside in long positions in U.S. dollar-denominated investment-grade corporate bonds. As in the case of IGHG, this strategy effectively eliminates exposure to riskier bonds with fund allocations in investment-grade issues.
Another option is the Xtrackers High Yield Corporate Bond Interest Rate Hedged ETF (BATS: HYIH)
HYIH seeks investment results that correspond generally to the performance of the Solactive High Yield Corporate Bond-Interest Rate Hedged Index–more high yield to appease Axelrod’s appetite for risk. HYIH will invest at least 80% of its total assetsin instruments that comprise the underlying index, such as long positions in U.S. dollar-denominated high yield corporate bonds and shorts in U.S. Treasury notes or bonds of approximate equivalent duration to the high yield bonds.
To learn more about currency hedging or other DWS products, visit the DWS website.
For more market trends, visit ETF Trends.