Hedge Your Exposure To The Yen While Investing In Japan
What A Strong Dollar Means For Your Investments (Part 3 of 5)
Not only are your overseas investments affected by economic, political and market movement, they’re also impacted by currency fluctuations. So if you’re a U.S. investor like me, and you hold international ETFs, you may notice that a strong U.S. dollar can diminish your returns because those investments are held in the local currency. Many investors have already recognized this trend, as we’ve seen record flows into ETFs that are designed to hedge currency risk.
Market Realist – Hedge your exposure to the yen by investing in currency-hedged ETFs.
As we mentioned in the previous part of this series, it is important to hedge your currency exposure if you want to invest in Japanese stocks. The Nikkei 225 is an export-heavy index that has a heavy weightage towards stocks like Toyota (TM), Honda (HMC), and Sony (SNE). When the Japanese yen depreciates, these stocks and the Nikkei 225 will gain because a weaker currency makes that country’s exports attractive. The monetary easing program in Japan has led to the depreciation of the yen.
The graph above compares the returns on the MSCI Japan Index, the iShares MSCI Japan ETF (EWJ)—which tracks the MSCI Japan Index—and its its currency-hedged sibling, the iShares Currency Hedged MSCI Japan ETF (HEWJ). These three have had total returns of 24.9%, 7.3%, and 24.8%, respectively, over the last 12 months. The yen has depreciated by about 14% during the same period.
Depreciation of the yen has led to a muted performance for EWJ. Similarly, the iShares MSCI EMU ETF (EZU) has seen negative returns due to a weaker euro relative to the US dollar. Compare this to the stellar returns of the iShares Currency Hedged MSCI EMU ETF (HEZU).
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