Entering this year, there was optimism that bond yields would decline and the U.S. dollar would weaken, potentially boosting export-driven companies while dealing a blow to the concept of currency hedging.
The opposite has played out. Ten-year Treasury yields are surging and the U.S. Dollar Index is following suit as the greenback again ranks as one of the year’s best-performing major currencies. Translation: The case for currency hedging via exchange traded funds remains alive and well.
That’s good news for funds such as the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG). The fund, which debuted about nine and a half years ago, is the currency-hedged counterpart to the popular WisdomTree International Quality Dividend Growth Fund (IQDG). IHDG is popular in its own right, as highlighted by its $1.69 billion in assets under management. More important than popularity is performance. Proving the validity of currency hedging, IHDG is beating the unhedged MSCI EAFE Index by more than 360 basis points year to date.
As its name implies, IHDG is also a dividend ETF, meaning it’s pertinent for investors to measure its performance over holding periods of more than just nine months. On that note, the WisdomTree fund answers the bell. Over the past three years, IHDG has beaten the MSCI EAFE Index by 940 basis points while delivering annualized volatility that 250 basis points below that of the MSCI gauge.
“Changes in foreign currency values can have a substantial impact on returns of foreign investments. Investing in securities with appreciating currency can boost returns while depreciating currency may reduce profits,” according to WisdomTree research. “Over the long-term investment horizon, currency exposure contributed little to excess returns with higher volatility. In the short run, it routinely detracted from performance while providing significantly higher volatility, except for the most recent one-year period.”
Another reason for advisors and investors to consider IHDG is that foreign currency markets are volatile and that turbulence could be amplified in the months ahead, as some global central banks move to lower interest rates ,while others may be faced with no choice but to boost borrowing costs in an effort to dampen inflation.
“For longer-term, strategic investors, we continue to advocate for currency-hedged exposures such as the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG). With currency volatility poised to increase on account of central bank policy divergence in the coming months, isolating equity returns from currency returns could be an effective method of risk management,” concluded WisdomTree.
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