The U.S. dollar has recently gained some momentum with the PowerShares DB US Dollar Index Bullish Fund (NYSEARCA: UUP) up more than 2% over the past week. If this dollar rebound is credible and lasts, investors may want to consider revisiting currency hedged exchange traded funds, including the Deutsche X-trackers MSCI All World ex US Hedged Equity ETF (NYSEArca: DBAW).
DBAW tracks the MSCI ACWI ex USA US Dollar Hedged Index, which “is designed to provide exposure to equity securities in developed and emerging stock markets (excluding the U.S.), while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and selected non-U.S. currencies,” according to DWS.
With the Federal Reserve looking to hike interest rates and the U.S. economy continuing to strengthen, the U.S. dollar’s recent decline could be quickly pared and even push higher, potentially weakening foreign equity returns once currency fluctuations are taken into account. The Fed has already boosted borrowing costs once this year and some market observers believe that number could reach four by the end of the year.
Currency Hedge Advantages
As the U.S. dollar strengthens, foreign currencies would depreciate. If an investor holds a foreign stock that is denominated in the local currencies, a weaker foreign currency would translate to a lower USD-denominated return on that foreign equity exposure.
DBAW holds over 1,700 stocks, many hailing from markets with attractive valuations relative to major U.S. equity benchmarks. International equities have long played second fiddle to U.S. markets, lagging behind U.S. equities for many years following the global financial downturn. However, after years of outperformance, U.S. stocks are beginning to look expensive, so more investors are turning to cheaper opportunities abroad.