Eric Dutram: Although many investors might have a bearish long-term outlook for the U.S. dollar, the greenback is still the main reserve currency and safe haven destination in the world today. While some thought that the euro or the yuan would eventually unseat the dollar from its perch, that appears to be years off at least thanks to the ongoing European crisis and a possible slowdown in the Chinese market.
Thanks to these situations the dollar has managed to be the ‘least bad’ major currency as small levels of job growth and the flexibility afforded to the world’s reserve currency have helped to carry the U.S. and the dollar during this difficult time.
With this backdrop the dollar has seen modest inflows, pushing the U.S. dollar index sharply higher in recent weeks and leaving the greenback as one of the best performing currencies year-to-date.
While this situation may be advantageous to foreign investors with lots of dollar denominated assets, it can hurt U.S. investors who are looking to purchase foreign stocks and bonds (China Currency ETFs: Slow and Steady in 2012?).
That is because, for American investors in locally denominated products, a stronger dollar translates into losses, potentially pushing an investment into the red even if stocks are performing well in a given period (also see Bet Against the Dollar with These Three ETFs).
Thanks to this, many may not have realized that a bet on a foreign market is not only a purchase of a stock or bonds in the country but also a bet on a local currency against the dollar as well. This is because this dollar strength marks a huge reversal for the currency as it had been very weak, adding to the returns of those who had purchased assets denominated in euros, baht, rand, or any number of other currencies that have managed to perform well against the dollar in the recent past.
Thanks to this currency issue, investors need to be cautious when scooping up foreign assets and consider the dollar’s projected movements as well. After all, there isn’t much that is worse than seeing a solid pick in terms of country exposure produce gains only to see this evaporate thanks to a weak foreign currency.
While holding out for future dollar weakness is certainly a path that investors can take, there are a number of ETFs that could also assist in flushing out currency exposure from an investment. While it is true that a play could be made with a currency ETF, more hands-off investors may want to consider any of the ‘hedged currency ETFs’ instead (also see Does Your Portfolio Need A Hedge Fund ETF?).
These products look to strip out currency exposure to a foreign economy—or region—via the use of currency forwards or other instruments that bet against the non-dollar currency. This strategy can help to reduce total costs and take out the guesswork from the process, something that is lacking when investors use regular currency ETFs to hedge their positions.
For investors intrigued by this strategy, there are a few options currently on the market. Below, we briefly highlight some of these choices for investors who believe that the dollar may still have a bit of room to run but are looking to maintain some level of exposure to foreign markets nonetheless:
Individual Country Currency Hedged ETFs
Right now, two companies account for all of the currency hedged products in the ETF world at this time, Deutsche Bank and WisdomTree. In terms of single country ETFs that hedge out currency exposure, there are currently four:
WisdomTree Japan Hedged Equity Fund (DXJ) – This product looks to give investors exposure to broad Japanese markets while mitigating the fluctuations of the yen. Top sectors include; industrials, consumer cyclical firms, and financials.
Db-X MSCI Brazil Currency-Hedged Equity Fund (DBBR)- This product gives investors exposure to Brazil without the real exposure, charging investors 61 basis points a year in fees. Financials, basic materials and energy take the top three spots from a sector perspective (see The Comprehensive Guide to Brazil ETFs).
Db-X MSCI Canada Currency-Hedged Equity Fund (DBCN)-This ETF tracks the broad Canadian markets but it does so in a way that strips out exposure to the Canadian dollar, all the while charging investors 51 basis points for this service. Top holdings include financials, energy, and basic materials, while it is light in technology, utilities, and health care.
Db-X MSCI Japan Currency-Hedged Equity Fund (DBJP)- Much like DXJ, this product tracks the broad Japanese economy but without the impact of the Japanese yen, charging investors 51 basis points a year in fees. Industrials, consumer, and financials take up the top three sectors while it is light in energy, utilities and real estate.
Regional Hedged ETFs
Beyond individual country hedged products, there are also a few ETFs that take a look from a regional perspective as well. In this way, investors can gain hedged exposure to a number of markets across multiple currencies via a single ticker:
Db-X MSCI EAFE Currency-Hedged Equity Fund (DBEF)- This broad ETF which charges investors 36 basis points a year in fees, tracks a broad market of countries in the EAFE region—Europe, Australasia, and Far East—without currency exposure. Japan, the UK, and Switzerland take the top three spots from a country perspective, while a large deal of hedged out currency exposure comes from the euro, pound, and yen (see Beyond Germany: Three European ETFs Tracking Strong Countries).
Db-X MSCI Emerging Market Currency-Hedged Equity Fund (DBEM)- For emerging market focused investors, DBEM is one of the only choices out there, charging investors 69 basis points a year for its hedged exposure. Top countries in this fund include China, Korea, and Taiwan, while currency exposure that is hedged out includes that of the Hong Kong dollar, South Korean won, and the Brazilian real.
WisdomTree International Hedged Equity Fund (HEDJ) – WT’s broad play on the global developed markets without currency exposure is HEDJ, a fund that charges 58 basis points a year. The UK, Japan, and Australia account for the three biggest countries in the fund while the currency exposure that is filtered out largely comes from these nations’ currencies as well as the euro.
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