Dollar Dominance Supports Case for This ETF | ETF Trends

Much has been made about the specter of the U.S. dollar potentially losing its status as the world’s reserve currency. The reality is that hasn’t happened. In fact, the greenback has been surprisingly sturdy for a longer timeframe than many market observers expected.

Over the past several years, experts speculating that the dollar was in for significant retrenchment have been proven wrong. As a result, the experts critiqued the efficacy of currency-hedged exchange traded funds have also been proven wrong. Just look at the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG).

Over the three years ending May 1, IHDG, which follows the WisdomTree International Hedged Quality Dividend Growth Index, returned 22.8%. Translation: IHDG beat the unhedged MSCI EAFE Index by better than 3-to-1 over that period.

Strong Dollar Benefits Could Linger

With “higher for longer” becoming the prevailing wisdom on the Fed’s treatment of interest rates, the dollar may also be higher for longer. As IHDG has proven, that scenario provides benefits to currency-hedged ETFs. Plus, it doesn’t appear that the dollar’s dominance will wane anytime soon.

“The dollar’s international role remains dominant simply because no other economy or market can match the depth of the US capital markets and the liquidity that it provides, both as a means of raising capital, but also as a store of value for investment; while also offering the strong protection of property rights, strong sovereign credit ratings, the rule of law, and an open capital account,” noted James Lord, head of foreign currency for emerging markets at Morgan Stanley. “There simply isn’t another market that can challenge the US in that respect.”

The $2.42 billion IHDG turns 10 years old on May 7. The fund is a relevant consideration for investors looking to add international diversification to equity portfolios. Why? Because the ETF features significant exposure to countries and regions that are often positively correlated to dollar strength. That includes Japan and Europe’s export-heavy economies.

Japan Stocks Among World’s Bets Performers

“G10 economies typically choose to control rates and leave their currencies to float, and the U.S. and Japan are no exception. So, while the Fed’s policy rate has risen to multi-decade highs, Japan’s has been left basically unchanged, consistent with its economic fundamentals,” observed David Adams, head of G10 foreign currency strategy at Morgan Stanley.

Japan stocks are among the world’s best performers over the past two years, particularly on a hedged basis because the yen has been weak relative to the dollar. Japan is IHDG’s second-largest country exposure at 14.63%.

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