ETFdb Logo
ETFdb Logo
  • ETF Database
  • Channels
    • Active ETF
    • Beyond Basic Beta
    • China Insights
    • Climate Insights
    • Commodities
    • Core Strategies
    • Crypto
    • Disruptive Technology
    • Energy Infrastructure
    • ESG
    • ETF Building Blocks
    • ETF Education
    • ETF Strategist
    • Fixed Income
    • Free Cash Flow
    • Gold/Silver/Critical Minerals
    • Innovative ETFs
    • Institutional Income Strategies
    • Leveraged & Inverse
    • Managed Futures
    • Market Insights
    • Modern Alpha
    • Night Effect
    • Portfolio Strategies
    • Retirement Income
    • Richard Bernstein Advisors
    • Tax Efficient Income
    • Volatility Resource
  • 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
    • ETF Data for Journalists
    • ETF Nerds
  • 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 Trends on Videos
    • ETF Trends on Podcasts
    • ETF Prime Podcast
  • Company
    • About VettaFi
    • Get VettaFi’ed
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. Currency Hedged ETFs
  2. How To Invest Overseas (Without Currency Risk)
Currency Hedged ETFs
Share

How To Invest Overseas (Without Currency Risk)

Stoyan BojinovOct 06, 2015
2015-10-06

ETFs continue to open up the doors to international markets that were previously too difficult, or costly, to access for mainstream investors. While many have taken advantage of this by adding geographic diversity to their portfolios, few have considered the impact of currency fluctuations on their foreign, non-U.S. dollar denominated investments. Whether they realize it or not, investors with exposure to Brazilian or Japanese stocks, for example, are also exposed to the currency risks associated with the Brazilian real and the Japanese yen respectively. As such, Martin Kremenstein, Director and Chief Investment Officer of Deutsche Bank Commodity Services, took time to discuss the importance of currency exposure and how the lineup of currency-hedged ETFs offer a creative way to evade currency fluctuations without sacrificing international exposure.

ETF Database: Can you explain the basic nuances associated with investing in foreign currency-denominated assets?

Martin Kremenstein (MK): When a U.S.-based investor invests in a foreign currency-denominated asset, like a foreign equity or bond, they are exposed to two sets of risk factors: the exposure to the asset itself (eg, Petrobras stock) and the exposure to the currency the asset is denominated in (in this case, Brazilian real). Both these risk factors drive return; for example, if a U.S. investor holds Petrobras stock and the stock does not move on a day, but the Brazilian real drops 10%, then that investor has lost 10%.

Currencies can have large fluctuations or move in long trends that do not necessarily correlate to the long term performance of the companies denominated in those currencies, especially when those companies are large, diversified, global firms. We think the majority of investors are seeking pure exposure to these companies in the same way they invest in domestic firms, and take the currency risk as an unknown or necessary bi-product. With currency hedged ETFs, they now have a choice.

ETF Database: How serious of a threat to bottom line performance does currency fluctuation pose for most investors?

MK: Currency fluctuations can make a huge difference to performance over time and in the short term can add a lot of unnecessary volatility to a portfolio. Consider this, roughly 100% of the outperformance of EAFE over the S&P 500 from 2001 to 2011 came from the devaluation of the dollar vs. developed market currencies. As the US Dollar starts to strengthen, investors will face a very large headwind on their returns from their foreign currency-denominated assets [see For ETF Investors, Currency Exposure Matters More Than You Might Think].

When investing in securities denominated in a foreign currency (or multiple foreign currencies as is the case with ETFs that invest in more than one foreign market), investors are exposed to fluctuations in both the value of the security in its local currency as well as to fluctuations in the exchange rate of that local currency relative to the investor’s home, or base, currency. Moves in the local currency relative to the U.S. Dollar can have an adverse impact on an investor’s portfolio. Currency hedging eliminates the currency risk.

A hedged strategy, such as ours, enables investors to lock in the returns they made during the long periods of US Dollar weakness, while maintaining the same equity holdings. If the US dollar strengthens, they will not give back that return. Currency has increasingly been recognized as a separate asset whose pricing is driven by fundamentals that can differ from those which impact the underlying asset market.

ETF Database: How do your “currency-hedged” products go about achieving their objective? Why does it make sense to use the ETF wrapper for investors looking to purse this sort of strategy?

MK: The ETF invests in the underlying equities in the index and then uses one month FX forwards to hedge out the currency exposure.

The ETF wrapper gives the investors the trade in one convenient, low-cost wrapper. The products are designed to be used alongside their unhedged counterpart funds, as they differ only in the use of the currency hedge. For many investors, this is the only way to access foreign equities without taking on the currency risks. FX overlay managers are only available to larger investors. The only other option retail investors have to avoid currency risk is to not invest in foreign equities.

ETF Database: Would you consider “currency-hedged” ETFs as a core, or more tactical holding for long-term, buy-and-hold investors? Risk-tolerant ones?

MK: I think they belong in the core, alongside unhedged foreign equities. Investors should decide how much currency risk they want to take and adjust the hedged to unhedged positioning accordingly. We are giving investors the ability to manage their currency exposure and the returns from it in an active manner, rather than just taking it passively. The key, here, is that investors currently have unhedged currency risk at their core and may be exposed to more risk than they would ordinarily be comfortable. By using our hedged ETFs, investors can either eliminate this currency exposure or temper it by finding a hedging balance they are comfortable with.

The Bottom Line

The decisions on whether to accept the risks associated with currency exposure can seriously impact bottom line returns. Investors looking to tap into overseas markets, but are wary of potentially volatile and unfavorable currency fluctuations, ought to take a closer look at Deutsche Bank’s lineup of currency-hedged ETFs as they offer a compelling strategy with all the benefits associated with the ETF structure.


Content continues below advertisement

» Popular Pages

  • Tickers
  • Articles

Mar 27

Silicon Valley Bank: When Success Fails

Mar 27

China Booms and KraneShares ETFs Benefit  

Mar 27

Rosenbluth on Ultra-Short ETFs and More on “ETF IQ”

Mar 27

Model Portfolios: Finding the Right Fit for Clients

Mar 27

An Investment Case for the Energy Transition Portfolio

Mar 27

Add Duration to Your Portfolio

Mar 27

Client Portfolios May Need an Inflation Hedge

Mar 27

Consider Low Volatility ETF LVOL With Volatility Rising

Mar 27

As Bank Stocks Rally, Check Out RYF

Mar 27

Banks Rebound (But Doubt Remains)

QQQ

Invesco QQQ Trust

SPY

SPDR S&P 500 ETF Trust

VOO

Vanguard S&P 500 ETF

VGT

Vanguard Information...

SMH

VanEck Semiconductor ETF

XLK

Technology Select Sector SPDR...

VTI

Vanguard Total Stock Market...

SOXX

iShares Semiconductor ETF

BLOK

Amplify Transformational Data...

META

Roundhill Ball Metaverse ETF

Loading Articles...
Help & Info
  • Contact Us
Tools
  • ETF Screener
  • ETF Analyzer
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Performance Visualizer
  • ETF Database Model Portfolios
  • ETF Database Realtime Ratings
  • ETF Database Pro
More Tools
  • ETF Launch Center
  • Financial Advisor & RIA Center
  • ETF Database RSS Feed
Explore ETFs
  • ETF News
  • ETF Picks of the Month
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Best ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Legal
  • Terms of Use and Privacy Policy
  • © 2023 VettaFi LLC. All rights reserved.
Follow ETF Database
Follow ETF Database

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