Exchange traded funds that focus on foreign countries can affected by currency movements as well as the direction of stock markets. Currency fluctuations against the U.S. dollar are one factor that can have a big impact on the overall investment return.
With ETFs, investors can get exposure to international regions or individual countries.
“Going global in a portfolio has never been easier,” Aaron Levitt for Investopedia reports. “However, as investors have plowed some big dollar amounts into these international equity funds, they might not realize just how their returns can be influenced by how foreign currencies perform against the U.S. dollar. Rising and falling, pounds, euros, ringgits and rupees have a huge effect on whether or not investors will see strong returns.”
There are two parts to the total return of a foreign investment. One is based on how the stock performs in the local currency and another is based on how the currency is fluctuating against the U.S. dollar. Investors that put money into a foreign country ETF are indirectly currency trading. [International ETFs Minus Currency Risk]
For example, if an investor has the iShares MSCI Sweden ETF (EWD) in their portfolio, they have also invested in the Swedish krona relative to the U.S. dollar. Should the krona’s value go up, the returns gained by investors in EWD will be greater than if the krona had depreciated. However, if the local currency of a chosen foreign investment loses value, U.S. investors owning Swedish stocks would take a loss. [ETFs That Hedge Their Foreign Currency Exposure]
There are only a few options for those investors who want to take the currency factor out of foreign investments. ETFs that hedge currency fluctuations is the WisdomTree Japan Hedged Equity ETF (DXJ) and the WisdomTree Europe Hedged Equity ETF (HEDJ) .
These ETFs use derivatives to take the currency movements out of the returns in the funds, and provide a pure play on the equities, reports Levitt. [Currency Hedged ETF Falls with Japan Stocks, Higher Yen]
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.