ETFdb Logo
ETFdb Logo
  • ETF Database
  • Channels
    • Active ETF
    • Beyond Basic Beta
    • China Insights
    • Climate Insights
    • Commodities
    • Core Strategies
    • Crypto
    • Direct Indexing
    • Disruptive Technology
    • Energy Infrastructure
    • ETF Building Blocks
    • ETF Education
    • ETF Strategist
    • Financial Literacy
    • Fixed Income
    • Gold/Silver/Critical Minerals
    • Innovative ETFs
    • Institutional Income Strategies
    • Leveraged & Inverse
    • Managed Futures
    • Market Insights
    • Modern Alpha
    • Multifactor
    • Night Effect
    • Portfolio Strategies
    • Responsible Investing
    • Retirement Income
    • Richard Bernstein Advisors
    • Tax Efficient Income
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Sector Tracker Tool
    • ETF Database Categories
    • Head-To-Head ETF Comparison Tool
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
    • Indexes
    • Mutual Fund To ETF Converter
  • Research
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Index Education
    • Index Insights
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Multimedia
    • ETF 360 Video Series
    • ETF of the Week Podcast
    • ETF Prime Podcast
    • Video
  • Company
    • About VettaFi
    • Get VettaFi’ed
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. Currency Hedged ETFs
  2. Currency Hedging When Investing in Developing & Emerging Markets
Currency Hedged ETFs
Share

Currency Hedging When Investing in Developing & Emerging Markets

Bob CiuraOct 13, 2015
2015-10-13

Many exchange-traded funds (ETFs) focusing on developing and emerging markets have lost value this year. For example, the iShares MSCI Emerging Markets ETF (EEM A-) is down 10% year-to-date through October 8. By comparison, the S&P 500 Index is down just 3% in the same time. Aside from fears of economic slowdowns in emerging markets such as China, one of the biggest reasons for the relative underperformance of emerging-market ETFs is the strengthening U.S. dollar.

The U.S. dollar has risen sharply this year against a basket of most international currencies. This has amounted to a significant headwind for ETFs that focus on developing markets. As a result, investors should consider currency hedging when evaluating ETFs that invest in emerging markets. It is possible to purchase currency-hedged ETFs to help mitigate currency risk.

Currency Exposure Hurts Emerging-Market ETFs

The rising U.S. dollar has created a high level of currency risk for many internationally focused ETFs. As fears of declining economic growth spread, investing in emerging markets is looking increasingly risky. Investors may not have anticipated this risk at the beginning of the year, when the strong U.S. dollar was not a big issue. But for investors who believe the strong dollar environment may be here to stay for the foreseeable future, fortunately, there is a way to hedge against risk.

For example, an investor may want to invest in Russia, one of the high-profile emerging nations and a member of the BRIC group (Brazil, Russia, India, and China). However, that investor may not desire exposure to the Russian ruble, which has weakened considerably throughout 2015. A convenient solution to this would be to invest in currency-hedged ETFs.

Using the example mentioned above, an investor who purchased EEM at the beginning of the year would have lost 10% so far. However, there are a number of currency-hedged ETFs issued by the same company that allow for reduced currency risk. The currency-hedged alternative to EEM is the iShares Currency Hedged MSCI Emerging Markets ETF (HEEM). This ETF seeks similar equity market exposure as the EEM fund but also employs currency-hedging techniques to reduce exposure to foreign exchange fluctuations.

The ETF was developed by MSCI as an equity benchmark for global emerging-markets stock performance, with the benefits of having the currency risk of the securities included in the underlying index hedged against the U.S. dollar. This strategy has worked well for investors because by purchasing the HEEM ETF at the beginning of the year instead of EEM an investor would have suffered half the losses so far this year.


Content continues below advertisement

The Bottom Line

Emerging markets were previously thought to be the best opportunity for investing in countries with above-average growth potential. However, the strengthening U.S. dollar has severely impacted that thesis. Fortunately, there are a number of currency-hedged ETFs that can reduce an investor’s exposure to foreign exchange risk and still offer exposure to higher-growth, under-developed nations.

Image courtesy of sheelamohan at FreeDigitalPhotos.net

» Popular Pages

  • Tickers
  • Articles

Jun 02

A Cash Alternatives ETF With a Distribution Yield Over 6%

Jun 02

Treasury Yields Snapshot: June 2

Jun 02

Main Management Market Note: June 2, 2023

Jun 02

China’s EV Market Recovers, Keep an Eye on KARS

Jun 02

A Debt Limit Deal Is Made, Target Treasuries of Any Duration

Jun 02

This Week in ETFs: Only 2 Launches, Many Closures

Jun 02

As Summer Nears, Eye Travel Stocks in JRNY

Jun 02

NYSE’s ETF Leaders: Northern Trust’s Michael Natale

Jun 02

Seize Market Gains & Optimize Dividends With KVLE

Jun 02

VettaFi Voices: Active or Passive for ESG ETFs?

QQQ

Invesco QQQ Trust

SPY

SPDR S&P 500 ETF Trust

SMH

VanEck Semiconductor ETF

VGT

Vanguard Information...

VOO

Vanguard S&P 500 ETF

IYW

iShares U.S. Technology ETF

XLK

Technology Select Sector SPDR...

JEPI

JPMorgan Equity Premium...

BOTZ

Global X Robotics &...

FNGU

MicroSectors FANG+ Index 3X...

Loading Articles...
Our Sites
  • VettaFi
  • Advisor Perspectives
  • ETF Trends
Tools
  • ETF Screener
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Database Pro
More Tools
  • Financial Advisor & RIA Center
Explore ETFs
  • ETF News
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Information
  • Contact Us
  • Terms of Use and Privacy Policy
  • © 2023 VettaFi LLC. All rights reserved.

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

ETF Education Channel

How to Allocate Commodities in Portfolios

Tom LydonApr 26, 2022
2022-04-26

A long-running debate in asset allocation circles is how much of a portfolio an investor should...

Core Strategies Channel

Why ETFs Experience Limit Up/Down Protections

Karrie GordonMay 13, 2022
2022-05-13

In a digital age where information moves in milliseconds and millions of participants can transact...

}
X