The currency markets have been unpredictable, with the U.S. dollar unexpectedly weakening this year, adding another layer of risk when ETF investors seek to gain exposure to potential overseas opportunities.
On the upcoming webcast (available live and on demand for CE Credit), Tired of Trying to Determine Which Way the Dollar is Headed?, Salvatore Bruno, Chief Investment Officer and Managing Director of IndexIQ, and Yan Yan, Associate Director of Research and Analytics at FTSE Russell, will outline risks international markets pose to equity investments and discuss hedging strategies to better manage exposure to global markets.
For instance, ETF investors may consider alternative options that take a more neutral view on foreign currency movements through a handful of 50% hedged/50% unhedged options, including the IQ 50 Percent Hedged FTSE International ETF (NYSEArca: HFXI), IQ 50 Percent Hedged FTSE Europe ETF (NYSEArca: HFXE) and IQ 50 Percent Hedged FTSE Japan ETF (NYS Arca: HFXJ). All three funds have approximately half their currency exposure of the securities in the underlying index hedged against the U.S. dollar on a monthly basis.
The forex market is volatile, and the U.S. dollar has been depreciating since the start of the year. Consequently, investors who have a more neutral stance on the foreign exchange outlook may consider a 50% hedged international investment as a way to limit volatility in their international exposure due to a sudden currency swing.
Related: International ETF Exposure That Neutralizes Currency Risks
IndexIQ research has shown that a 50% currency hedged approach can reduce the potential risk of misreading extreme currency movements in either direction and can also have a dampening effect on volatility, which may help investors capture any further upside potential while hedging against downside risks associated with harmful currency moves.
“International equities play a natural role in a diversified portfolio. But, with foreign exposure, comes currency risk. For investors that either don’t have a strong view on currency or are concerned about making the wrong currency bet, a 50% hedged solution gives 100% of the international equity exposure, with only 50% of the currency exposure — providing the potential to smooth the ride of currency volatility. IndexIQ’s suite of currency hedged ETFs offers a static 50% currency hedge that never has to be lifted or adjusted. It’s a tax-efficient, neutral position that is neither actively bullish nor bearish on the direction of the U.S. dollar or foreign currencies,” according to IndexIQ.
Financial advisors who are interested in learning more about currency-hedged international strategies can register for the Wednesday, November 8 webcast here.