Emerging Markets Less Bad With Currency Hedging

Emerging markets stocks and the related exchange traded funds are getting drubbed this year. Strength in the U.S. dollar is widely cited as one of the reasons emerging markets assets are slumping, a scenario that highlights the utility of currency hedged funds.

Investors who are concerned about the continued strength in the U.S. dollar and its effect on emerging market exposure can also consider the iShares Currency Hedged MSCI Emerging Markets ETF (NYSEArca: HEEM) and the Deutsche X-trackers MSCI Emerging Markets Hedged Equity Fund (NYSEArca: DBEM).

HEEM, which holds the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) with a currency hedged overlay, entered Friday with a year-to-date loss of just under 3%, significantly less bad than that of the unhedged MSCI Emerging Markets Index.

“For U.S. investors, if the dollar gets stronger, that exchange rate translates into lower returns for the international holdings,” said BlackRock. “If the dollar gets weaker, the opposite occurs, boosting returns. Given that the U.S. dollar on a trade-weighted basis is up more than 5% year-to-date against a basket of developed and emerging markets currencies, the currency move has impacted portfolios.”

Weighing On Performance

As this year’s price action confirms, investing in emerging markets assets without a currency hedge can be a risky proposition.