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Currency-Hedged ETF Investing to Limit Foreign Exchange Risks

This article was originally published on ETFTrends.com.

As international central banks adjust their monetary policies to support further growth in the global economy, investors who are considering foreign market exposure should also look into currency-hedged exchange traded funds that limit potential foreign exchange risks.

"Where it's really, for us, becomes interesting is how that affects currencies, and you know we've been really much in the forefront of currency-hedging international equities," Luke Oliver, Head of Investing, Americas, DWS, said.

Specifically, we are witnessing international central banks cutting their interest rates to further support growth, which has weakened their local currencies. In an environment of supportive monetary policy that could fuel further market growth but a depreciating domestic currency, investors who want global exposure should consider ways to limit currency risks.

Oliver explained that when you are exposed to international equity funds, an investor is both long on the equity and long on the local currencies. While the equities may be doing well, an investor may not realize that they can still lose out if the local currency depreciates against the U.S. dollar.

Alternatively, a rebounding dollar or weakening overseas currencies are likely to help currency hedged exchange traded funds, such as the Xtrackers MSCI EAFE Hedged Equity ETF (DBEF) . As the U.S. dollar strengthens, foreign currencies would depreciate. If an investor holds a foreign stock that is denominated in the local currencies, a weaker foreign currency would translate to a lower USD-denominated return on that foreign equity exposure. DBEF provides exposure to equity securities in developed international stock markets, while at the same time mitigating exposure to fluctuations between the value of the U.S. dollar and non-U.S. currencies.

Investors can also track other various market segments in the international space while hedging against currency risks through currency-hedged ETF strategies. For instance, the Xtrackers MSCI All World ex US Hedged Equity ETF (DBAW) provides broad market exposure by following a market cap-weighted index of international stocks, excluding U.S. exposure and hedging against depreciation in the underlying currencies against the U.S. dollar. Additionally, the Xtrackers MSCI Emerging Markets Hedged Equity Fund (DBEM) targets the emerging markets.

Hear from Luke Oliver discuss currency-hedged ETF strategies:

https://youtu.be/8VTMVAZQ82I

For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category.

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