A Guide to Currency Hedging When the Dollar Is Strong

The converse movement of the two currencies is all tied to the complexities surrounding energy in Europe and the soaring energy prices affecting the European economy. The dollar index, an index that tracks the dollar compared to six different currencies, was above 107, a reading that was last recorded in December 2002. Year-to-date the index is up 12% and is trending toward its strongest year since 2014.

“You have traditional macro factors that are driving dollar strength right now rather than a risk-averse move,” said Shaheb Jalinoos, global head of macro trading strategy for Credit Suisse. "High interest rates in the U.S. and a trade shift which is beneficial to the U.S. adds to sustainability of the dollar’s strength.”

Currency hedging is essentially like insurance for international investments. A fund that utilizes currency hedging will include a portion specifically targeted to neutralize changes in the value of the currency’s exchange rate, thus allowing investors to capture the total return of their equity investment. The dollar carries a negative correlation to the S&P 500, at -0.46 as of May, while foreign currencies have become increasingly correlated to the S&P 500.

WisdomTree offers a variety of currency hedged options, from broader markets to targeted country exposures, and even drills down into small-cap opportunities within countries, some of the most direct investments possible into the value opportunities within another country’s economy.

For broader, currency hedged investment opportunities, there is the WisdomTree Europe Hedged Equity Fund (HEDJ B), which gives exposure to dividend-paying companies within the Eurozone, and the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG B+) which invests in dividend-paying growth companies in developed countries ex-U.S. and Canada.

A popular choice for investors has been the WisdomTree Dynamic Currency Hedged International Equity Fund (DDWM B), which invests in dividend-paying companies from industrialized companies globally ex-U.S. and China, all while dynamically hedging for the currency ratio using a rules-based process that takes into account value, momentum, and interest rates.

Targeted country ETFs with currency hedges are the popular WisdomTree Japan Hedged Equity Fund (DXJ B-) and the WisdomTree Germany Hedged Equity Fund (DXGE B), which both invest in dividend-paying companies that have an exporter tilt.

For small-cap exposure, options include the WisdomTree Dynamic Currency Hedged International SmallCap Equity Fund (DDLS ), the WisdomTree Europe Hedged SmallCap Equity Fund (EUSC B), and the WisdomTree Japan Hedged SmallCap Equity Fund (DXJS B-).

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