A volatile election week only amplifies the case for currency hedging. With the dollar fluxing up and down against its foreign counterparts, it’s important for investors to get currency hedging exposure amid all the volatility that’s certain to come in an election week.
“The U.S. dollar hit one-month highs against a basket of peers on Monday and expected volatility in major currencies rose to the highest levels since April on investor jitters over the outcome of Tuesday’s U.S. presidential election,” a CNBC forex report noted. “The dollar has strengthened in the past week as risk sentiment has soured, with investors reducing positions due to uncertainty over the result.”
“The move we saw last week was a pretty broad derisking and I think that makes a lot of sense; people are naturally skeptical about any sort of prognostication with regards to the election after what happened four years ago,” said Erik Nelson, a Macro Strategist at Wells Fargo in New York.
“The closer the election is, the more likely it is to be delayed or contested and that’s the perfect storm for risk assets to go down,” Nelson added.
Currency Hedging Built Into ETFs
An interesting all-world play that hedges against currency fluctuations against the U.S. dollar is the Xtrackers MSCI All World ex U.S. Hedged Equity ETF (DBAW). DBAW seeks investment results that correspond generally to the performance, of the MSCI ACWI ex USA US Dollar Hedged Index.
DBAW uses a “passive” or indexing investment approach, which is designed to track the performance of equity securities in developed and emerging stock markets while mitigating exposure to fluctuations between the value of the USD and the currencies of the countries included in the underlying index. It will invest at least 80% of its total assets in component securities of the underlying index.
Another option is the Xtrackers MSCI EAFE Hedged Equity ETF (DBEF), which seeks investment results that correspond generally to the performance, before fees and expenses, of the MSCI EAFE US Dollar Hedged Index. The fund seeks investment results that correspond generally to the performance 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. It will invest at least 80% of its total assets in component securities of the underlying index.
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