Owing to the Federal Reserve’s move to take interest rates to record lows, the U.S. dollar is sagging this year. Greenback weakness doesn’t spell trouble for investors considering international equities.
In fact, with the right strategies, advisors can present clients with opportunities for profiting from the flailing dollar. Consider the Developed International Model Portfolio, which is part of WisdomTree’s Modern Alpha lineup of model portfolios.
“This model portfolio is designed for investors with a long-term horizon looking for exposure to a broad universe of Developed International equities primarily using factor focused ETFs,” according to WisdomTree. “The selected ETFs provide certain factor tilts that have the potential to generate excess return relative to comparable cap-weighted benchmarks over longer-term holding periods. The strategies may use both WisdomTree and non-WisdomTree ETFs.”
The model portfolio features a mix of hedged and unhedged international equity ETFs.
“For an unhedged foreign-stock fund, the biggest effect will come directly from the currency movements where, when you own a foreign-stock fund, you effectively are owning stocks that are denominated in different currencies,” notes Morningstar analyst Alex Bryan. “So as the dollar becomes weaker, those stocks become worth more in U.S. dollars, so you actually have a direct bet against the U.S. dollar baked into unhedged foreign-stock funds. Those should actually benefit from a weaker dollar.”
One of the pillars of the Developed International Model Portfolio is the WisdomTree Dynamic Currency Hedged International Equity Fund (CBOE: DDWM). As its name implies, DDWM is dynamic, meaning its hedging mechanism shifts with the times so it becomes less impactful as the dollar weakens and more potent as the greenback strengthens.
A fully hedged portfolio position has historically diminished returns when the U.S. dollar depreciated or international currencies strengthened. Since a hedged portfolio shorts foreign currencies, investors would miss out on the added boost if international currencies appreciated.
Unlike other popular currency-hedged ETF offerings with a static foreign exchange hedge, the Dynamic Currency Hedged Equity Fund will hedge currency fluctuations in the relative value of the foreign currencies against the USD, ranging from a 0% to 100% hedge based on interest rate differentials, valuations and relative price momentum of the foreign currencies compared to the USD. This may help the so-called dynamic currency-hedged ETF adjust to changes in the dollar ahead.
For more on how to implement model portfolios, visit our Model Portfolio Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.