While the U.S. dollar has weakened against foreign currencies, international stock investors should still keep in mind the benefits of hedging foreign exchange swings ahead and even look to targeted exchange traded fund strategies to limit currency risks.
“Our view is that you should almost always currency hedge,” Luke Oliver, Managing Director and Head of ETF Capital Markets for DWS, said at the Inside ETFs 2018 conference. “The fundamentals for a strengthening dollar still remains – rates are rising quicker here than elsewhere. You have a positive carry to currency hedge, and you also reduce your volatility.”
The currency-hedged international investment strategy is not a short-term play but a strategic long-term view for portfolio construction when incorporating international market exposure, which just so happens to be a good opportunity right now as many foreign markets look attractive relative to the pricey valuations here back at home.
“We see a strong case for always being hedged,” Arne Noack, Head of ETPs Development for DWS, said. “You significantly reduce the volatility, so it is not only necessary on the return play but also reduction play, the risk reduction play for your portfolio.”
For instance, when gaining exposure to international equities, investors can look to something like 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.
Additionally, something like the Xtrackers MSCI Emerging Markets Hedged Equity ETF (NYSEArca: DBEM) can provided a currency hedged way to access the emerging markets in case the U.S. dollar continues to strengthen.
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