How to Stick With EM Equities if Dollar Rebounds

One of the reasons emerging markets equities are performing well this year is because the U.S. dollar is weak. Even if the dollar rebounds, investors can maintain exposure to developing economies with the help of currency hedged exchange traded funds, such as the Deutsche X-trackers MSCI Emerging Markets Hedged Equity ETF (NYSEArca: DBEM).

When exposed to international equities, investors should keep in mind the foreign exchange fluctuations between the U.S. dollar and foreign currencies. If foreign currencies weaken or the U.S. dollar strengthens, international equity returns are lower when converted back into USD-denominated returns.

DBEM, which is about six and a half years old and has nearly $223 million in assets under management, tracks the MSCI EM US Dollar Hedged Index.

“The index is designed to provide exposure to equity securities in the global emerging markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and non-U.S. currencies. As of December 31, 2014, the Index included securities from the following 23 countries: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, South Korea, Malaysia, Mexico, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan, Thailand, Turkey, and United Arab Emirates,” according to Deutsche Asset Management.

Developing economies are showing macro stabilization where gross domestic produce and commodity prices that support their economies have stabilized. China, the second largest economy in the world, is also revealing signs of improving industrial production, steady infrastructure spending and a more stable yuan currency.