Dollar Strength Increasing Potency of Currency-Hedged ETFs

Entering 2024, it was widely believed the Federal Reserve could cut interest rates anywhere from three to six times. Nearly four months into the year, a single rate reduction has yet to arrive and there’s an increasing lack of clarity as to when one will materialize. That’s helped the dollar again rank as one of the best-performing major currencies in the world, providing ballast to currency-hedged ETFs along the way.

Take the case of the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG) — a dividend-based currency-hedged alternative to traditional developed markets index funds and ETFs.

The $2.36 billion IHDG is confirming its viability as an alternative to old-guard, nonhedged rivals. Year to date, the WisdomTree ETF is beating the MSCI EAFE Index by a margin of almost 3-to-1. That’s not a new phenomenon. As the dollar surged against rival currencies over the past three years — a period including the Fed’s tightening cycle — IHDG topped the MSCI EAFE Index by a 3-to-1 margin.

IHDG Worth Investigating

The persistently strong dollar and compelling valuations on ex-U.S. developed market equities represent a riddle for investors, because attempting to capitalize on nondollar assets can be risky when the greenback is strong. IHDG provides a solution for that scenario.

Those heavily invested in non-dollar-denominated assets may face challenges as the dollar strengthens. Consider hedging currency risk through derivatives or reallocating investments to sectors less sensitive to currency movements,” noted deVere Group CEO Nigel Green.

Another benefit offered by IHDG is that some its marquee holdings, while based outside the U.S., generate significant portions of their revenue in this country. That means those firms benefit from the strong greenback, because they convert dollars earned here into more of their local currencies. Examples include LVMH Moet Hennessy Louis Vuitton, AstranZeneca (AZN) and Novartis (NVS) – each of which is a top 10 holding in the ETF.

Additionally, some market observers believe the strong dollar isn’t a reason to eschew international equities in a wholesale manner. Rather, it is a matter of being selective and focusing on quality names in attractively valued regions — boxes checked by IHDG.

“Investors should consider selectively investing in regions with attractive growth prospects or undervalued assets. Diversifying globally can help mitigate concentration risk and enhance portfolio resilience,” concluded Green. “We expect the US dollar to continue its surprising strength throughout 2024 and extend its current momentum into 2025.”

For more news, information, and analysis, visit the Modern Alpha Channel.