Investors who are looking into international stocks should be wary of the potential negative effects of a strengthening U.S. dollar on their investments and may consider currency-hedged ETF strategies to limit the foreign exchange risks.
“We really want people to think about this strategically and long-term that being hedged makes a lot of sense,” Luke Oliver, Managing Director and Head of Capital Markets for DWS, said at the 2018 Morningstar Investment Conference.
DWS has maintained a belief that the U.S. dollar could strengthen based on their call that interest rates will rise as the U.S. Federal Reserve tightens its monetary policy and weaker data out of foreign markets that suggest possible easing or at the very least not tightening.
When investing in international markets, most investors are only looking at the possible opportunities or diversification effect provided by these foreign markets. However, many may be overlooking potential risks.
“Generally, what investors do when they look to international, they are thinking about those companies, the diversification they can get from those, and they take on all those currency risks,” Oliver said.
However, a rebounding dollar or weakening overseas currencies are likely to help currency hedged exchange traded funds, such as the Xtrackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF). 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. DBEF provides exposure to equity securities in developed international stock markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and non-U.S. currencies.
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