Just when it seems like it was safe to get back into the markets and turn on the risk again, a second wave of Covid-19 cases brought more market uncertainty back. In certain economies where the local currency can drive the price of assets like emerging markets, it’s essential to diversify and plan for uncertainty with hedging strategies.
Fortunately, there are ETFs that add a currency hedging component built in to the fund so that investors don’t have to take on multiple positions. ETF provider DWS currently has a suite of funds that cater to this hedging component:
- Xtrackers MSCI All World ex U.S. Hedged Equity ETF (DBAW)
- Xtrackers MSCI EAFE Hedged Equity ETF (DBEF)
- Xtrackers MSCI Japan Hedged Equity ETF (DBJP)
- Xtrackers MSCI Emerging Markets Hedged Equity ETF (DBEM)
- Xtrackers MSCI Europe Hedged Equity ETF (DBEU)
- Xtrackers MSCI Eurozone Hedged Equity ETF (DBEZ)
- Xtrackers MSCI Germany Hedged Equity ETF (DBGR)
A WiseRisk article noted three important reasons to implement a currency hedging strategy: diversification, political uncertainty and economic uncertainty. ETFs like those offered from DWS can help minimize downside risk by taking these potential issues into account.
On the topic of diversification:
“The globalization of business and markets is contributing to an increased allocation to international stocks in the portfolio, driving increasing currency risks. While investors may be eager to diversify their investments, they may not want to increase the overall risk of their portfolio, and as a result demand for currency-hedged funds by investors has been increasing. Hedging offers the opportunity to take advantage of these markets without having to accept the currency losses.”
Watch: What is Currency Hedging?
In terms of political uncertainty:
“The panic that occurred as a result of Brexit wiped $2 trillion off market values worldwide. It triggered one of the most volatile trading sessions in history. The British pound suffered its biggest one-day selloff. Sterling suffered a plunge in London, from $1.50 against US dollar to just $1.368 in a day. Drastic swings happen from time to time in history due to politics, but are challenging to predict, or come entirely as surprises due to the somewhat personal nature of the events.”
On economic uncertainty:
“Volatility witnessed across global stock markets in the last several years can in part be attributed to crises involving Greece, EU and IMF. Precise visibility into where your currency exposure is, and how much of it is hedged, is critical to protecting your returns from these types of events.”
For more news and information, visit the Smart Beta Channel.