Inflation fears are constantly swirling in the capital markets, putting upward pressure on the U.S. dollar on the prospect of higher rates, which may help bolster the case for the Xtrackers MSCI EAFE Hedged Equity ETF (DBEF).

When the dollar rises, DBEF softens the blow for affected currencies in its underlying index, which is mainly comprised of developed countries. A stronger dollar means that higher denominations of a foreign currency are required, which provokes devaluation.

DBEF seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI EAFE US Dollar Hedged Index. The fund, using a “passive” or indexing investment approach, seeks investment results that correspond generally to the performance, before fees and expenses, of the underlying index, which is designed to track developed market performance while mitigating exposure to fluctuations between the value of the U.S. dollar and the currencies of the countries included in the underlying index.

DBEF Chart

Inflation Picking Up Fast

The inflation fears are certainly warranted given that the data is available to back up the anxiousness. Even though the Federal Reserve has elected to keep interest rates steady for the time being, the sentiment is that inflation data will eventually force the Fed to change its course.

“Inflation in April accelerated at its fastest pace in more than 12 years as the U.S. economic recovery kicked into gear and energy prices jumped higher, the Labor Department reported Wednesday,” a CNBC report said.

“The Consumer Price Index, which measures a basket of goods as well as energy and housing costs, rose 4.2% from a year earlier,” the report added. “A Dow Jones survey had expected a 3.6% increase. The month-to-month gain was 0.8%, against the expected 0.2%.”

An Emerging Markets Alternative

Emerging markets investors feeling the jitters can look to the same currency hedging strategy. In this case, it’s the Xtrackers MSCI Emerging Markets Hedged Equity ETF (DBEM).

DBEM seeks investment results that correspond generally to the performance of the MSCI EM US Dollar Hedged Index. The fund, using a “passive” or indexing investment approach, seeks investment results that correspond generally to the performance, before fees and expenses, of the underlying index, which is designed to track emerging market performance while mitigating exposure to fluctuations between the value of the U.S. dollar and the currencies of the countries included in the underlying index.

DBEM Chart

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