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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