As many income-minded investors turn to alternative avenues in search for yields, international markets have become a popular destination, but one should be mindful of potential currency risks associated with overseas exposure. Consequently, investors may look to a currency-hedged dividend exchange traded fund to generate yields while mitigating foreign exchange fluctuations.
Investors have been flocking to international markets this year in search of equity exposure with more attractive valuations relative to U.S. stocks and potentially higher yield-generating opportunities.
The U.S. dollar has largely depreciated against many foreign currencies this year, and the U.S. dollar index is now hovering around its lowest point in almost a year. Now that the U.S. dollar has pulled back, contrarian traders are beginning to look at this cheaper level as a potential turning point.
Looking ahead, some market observers argue that the U.S. dollar may find more strength against other major global currencies. For instance, Robert Bush, an ETF Strategist at Deutsche Asset Management, said Deutsche Bank projects over the next year the euro currency will average $1.10 compared to its current price of $1.17 and the pound to average $1.23 compared to its current price of $1.30. The foreign currencies likely have more room to depreciate, given the U.S. Dollar Index has weakened over 8% so far this year.
Consequently, yield-seeking investors who are turning toward international markets may want to consider a currency-hedged strategy to limit the negative effects of weakening foreign currencies or a strengthening U.S. dollar on their investment. If a foreign currency weakens, a non-hedged foreign equity position would have a lower U.S. dollar-denominated return.
For example, the Deutsche X-trackers MSCI All World ex-US High Dividend Yield Hedged Equity ETF (NYSEArca:HDAW) is one such ETF. HDAW targets companies with higher-than-average dividend yields relative to their market-cap-weighted counterparts across both developed and emerging countries, excluding the U.S. Moreover, the ETF includes a currency hedge which helps negate the negative effects of weakening foreign currencies or a strengthening dollar on overseas returns. HDAW has a 2.46% 12-month yield.
For more focused exposure, the Deutsche X-trackers MSCI EAFE High Dividend Yield Hedged Equity ETF (NYSEArca:HDEF) tracks high dividend-yielding developed market stocks across Europe, Australasia and the Far East, and it hedges the currency risks as well. HDEF has a 2.68% 12-month yield.
Investors worried about continued devaluation in the euro currency but still want exposure to dividend-yielding stocks across the Eurozone may consider the Deutsche X-trackers MSCI Eurozone High Dividend Yield Hedged Equity ETF (NYSEArca:HDEZ). HDEZ has a 3.92% 12-month yield.
The Deutsche X-trackers MSCI Emerging Markets High Dividend Yield Hedged Equity ETF (NYSEArca:HDEE) tracks high-yielding emerging market companies and also provides a currency-hedged option on its developing market exposure. HDEE has a 4.00% 12-month yield.