Investing internationally is an important part of portfolio diversification and a way to capture exposure to some of the largest and strongest performing multinational companies like Toyota or Nestle. Todd Rosenbluth, head of research at VettaFi, was recently on TD Ameritrade to discuss investing internationally and the range of options within ETFs with host Nicole Petallides.
In a sea of investment challenges in 2022, international allocations have faced their fair share of difficulties, with the strongest dollar in over two decades impacting returns and how advisors and investors are thinking about their international allocations.
“Most international equity ETFs, there is no impact from a currency standpoint: you’re not getting the benefits of, or you’re actually getting hurt by that stronger dollar,” Rosenbluth explained.
The performance differential between an unhedged and currency hedged international equity allocation is noticeable this year: the iShares MSCI EAFE ETF (EFA) is down around 20% year-to-date but it’s hedged variation, the iShares Currency Hedged MSCI EAFE ETF (HEFA) is only down about 8%.
“You can really save some of the downside, reduce the risk of the currency through these under-the-radar international equity ETFs,” said Rosenbluth.
Currency hedged funds aren’t new, and experienced strong interest and investment in 2014-2015 when investors were looking to remove the impact of currencies like the yen and euro from their allocations, but that interest fell off as the weaker dollar detracted from hedging strategies. Now, in the face of a strong dollar that is at 20-year highs, currency hedging has become an important strategy once more when looking internationally.
A popular option for investors this year is the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG) which offers exposure to dividend yielding companies while hedging for currency fluctuations.
“Investors would benefit from having a strong dollar because you’re getting multinational companies that are looking and benefitting from exposure outside of Europe but with stable dividend paying companies,” explained Rosenbluth, compared to a fund like the WisdomTree Europe Hedged Equity ETF (HEDJ) that focuses solely within Europe.
For advisors and investors that are concerned about international risk, the Invesco S&P International Developed Low Volatility ETF (IDLV) is an option to consider the focuses on countries like Canada and Singapore that are lower risk, but it is not a currency hedged fund so advisors should be aware of currency impacts.
“We have found that advisors tend to take a broad approach to international investing, they’ve got broad market exposure, EAFE EM in particular, but we’re not seeing as much usage into those products like IDLV,” Rosenbluth explained. “You really can reduce the risk-profile of your international portfolio with some of these alternatively-weighted international equity ETFs.”
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