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8 Timely Europe, Japan ETFs Leading the Pack

This article was originally published on ETFTrends.com.

Despite the rising rates and strengthening U.S. dollar, Americans are looking at international markets and related ETFs.

Specifically, more investors are looking at developed markets like Europe and Japan. While the disparity between rising U.S. interest rates and negative rates out of the European Central Bank and Bank of Japan widens, traders are utilizing currency forwards to hedge out foreign-exchange risk, reports Mike Bird for the Wall Street Journal.

“If you look at a U.S.-based investor, they actually get a significant yield pickup going into Japan and Europe—it’s very interesting from a flow perspective,” Jamie Fahy, global macro strategist at Citigroup, told the WSJ, adding that the boost to returns could be one reason that European equity markets are outperforming the U.S. so far this year.

For instance, the iShares MSCI Japan ETF (EWJ)   is up 0.5% and iShares MSCI EMU ETF (EZU) is 2.1% higher year-to-date, while the S&P 500 is 0.8% lower.

U.S. investors have funneled $78 billion into Japanese and eurozone equity mutual funds and exchange-traded funds in the past year, according EPFR data. Meanwhile, Eurozone and Japanese investors pulled $160.8 billion more than they invested from U.S. equity funds over the same period.

According to U.S. Treasury International Capital surveys, which cover a broader group of investments, over the year to January, U.S. holdings of Eurozone and Japanese stocks increased at the fastest rate in at least five years, rising by $1.124 trillion.

Currency-Hedged ETF Options

As the U.S. dollar strengthens and international currencies depreciate, international stock ETF investors may also turn to currency-hedged ETF options that have a built in method to hedge the currency risks through currency forward contracts.

For instance, the depreciating JPY has allowed currency-hedged Japan ETFs to outperform their non-hedged peers. For instance, the WisdomTree Japan Hedged Equity Fund (DXJ) , iShares Currency Hedged MSCI Japan ETF (HEWJ) and Deutsche X-trackers MSCI Japan Hedged Equity ETF (DBJP) have been go-to options to access Japanese equities markets while hedging against foreign exchange risks.

Meanwhile, investors who believed the euro currency could weaken are bullish on the broader Eurozone can turn to ETFs like the Deutsche X-trackers MSCI EMU Hedged Equity ETF (DBEZ) , iShares Currency Hedged MSCI EMU ETF (HEZU) and WisdomTree Europe Hedged Equity Fund (HEDJ) .

For more information on international markets, visit our global ETFs category.