Analyzing How You Can Hedge Your Currency Exposure
To Hedge or Not to Hedge the US Dollar? (Part 6 of 6)
Currency hedging from a leading provider
Is hedging right for you? Currency volatility tends to smooth out over time, so it may not be necessary for your broad, long term building block positions. But if you take a more active view or hold more precise international exposures, then hedging through an ETF may be a sensible addition to your tactical investment strategy.
To position and potentially cushion your international holdings against currency risk, dollar-based investors can consider currency hedged versions of five iShares flagship international funds, including the iShares Currency Hedged MSCI EAFE ETF (HEFA), the iShares Currency Hedged MSCI EMU ETF (HEZU) and the iShares Currency Hedged MSCI Germany ETF (HEWG).
Market Realist – You can hedge your currency exposure by investing in currency-hedged ETFs.
The US dollar (UUP) strengthened against most major currencies. In this series, we’ve covered the effects of the strengthening US dollar on unhedged Japanese (DXJ) and European (EZU)(FEZ) investments.
The graph above compares the performance of the iShares MSCI EAFE ETF (EFA) and the iShares Currency Hedged MSCI EAFE ETF (HEFA). HEFA is EFA’s currency-hedged sibling. The graph also compares the performance of the iShares MSCI Japan ETF (EWJ) and the iShares Currency Hedged MSCI Japan ETF (HEWJ) in the last 12 months. HEWJ is EWJ’s currency-hedged sibling.
EFA tracks stocks from developed markets—for example, the US and Canada. Since most, if not all, of the developed market currencies depreciated against the US dollar, HEFA has been outperforming EFA. Over the last 12 months, HEFA and EFA had returns of 15.5% and -3.8%, respectively.
EWJ gave returns of 12.4%. This is good, but HEWJ gave returns of 30.6%.
The disparity is mainly due to the strengthening US dollar. Most analysts think that the US dollar could strengthen more, as mentioned earlier. As a result, you should consider currency-hedged ETFs when you invest internationally (ACWI)(VEU).
Read the Market Realist series Currency war – a race to the bottom for more on why the US dollar appreciated.
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