Is it time for international currency-hedged ETFs?

Jhe policy differential across the world has led investors in the ETF world to see the impact of currencies on their foreign holdings. This is all the more true in light of heightened fears of rate hikes in the US and bottoming rates in the Eurozone and Japan. Some emerging economies are also pursuing easy money policies.

The Fed decreed a 25 basis point rate hike in March and a 50 basis point rate hike in May. Markets are pricing in another 190 basis point rate hike in 2022. As a result, the greenback has strengthened.

Many currencies are collapsing against the US dollar, negatively impacting stock prices as US investors repatriate returns earned overseas. Invesco DB US Dollar Index Bullish ETF UUP is up 8.3% this year.


The yen is trading at a two-decade low against the greenback. Currency devaluation is always a boon for the exporting nation like Japan. A weaker yen makes Japanese products more competitive in the global market, increasing profit margins in their key businesses.

In recent months, Japan has received what it has long wanted, although rapidly rising food and energy prices are disrupting the economy in a moderate inflation scenario. Invesco CurrencyShares Japanese Yen Trust FXY is down 10% in the past six months.


Invesco CurrencyShares Euro Currency Trust FXE is down 7.3% this year. Although the euro is close to parity with the greenback, FXE is still down 2% last month. If the Fed maintains its aggressive short-term rate hike momentum, the greenback could appreciate further.

Emerging Markets

WisdomTree Emerging Currency Strategy Fund CEW was down 3% last month. Most emerging market currencies will likely fall over the medium term. In particular, emerging markets are commodity-rich and have therefore largely benefited from the latest commodity rally.

But a Reuters article published in early April revealed that even currencies that have benefited from the ongoing rise in commodities and the tightening of policy by their respective central banks, such as the Brazilian real and the South African rand, are expected ( according to economists) lose about half of these. win in a year. This article indicated that the Mexican peso – a classic emerging market currency hedge – is expected to give up more than three times its gains for this year in 12 months.

International stocks cheaper than US stocks

According to an article published in the Wall Street Journal, US stocks look expensive compared to their international counterparts. Even though it was down 16% to start 2022, the S&P 500 is trading at 16.8 times its projected earnings over the next 12 months, which is still above the average multiple of 15.7 over the past 20 years, according to FactSet, quoted on Wall Street Journal.

By comparison, Hong Kong’s Hang Seng is trading at 9.5 times its expected earnings, the Nikkei 225 in Japan is trading at 14.3 times earnings and the DAX in Germany at 11.4 times, according to the article. WSJ. Only benchmarks in Belgium, Portugal and Saudi Arabia, as well as the technology-heavy Nasdaq Composite, have higher valuations based on future earnings than the S&P 500, according to data available on FactSet (read: Are international ETFs cheaper than US ETFs?).

Morgan Stanley strategists are also overweight the FTSE 100, as cited in a Bloomberg article. Notably, the FTSE 100 represents more than 80% of the market capitalization of the London Stock Exchange.

Currency Hedged ETFs to Rule

Thanks to this currency issuance, investors should be vigilant when buying foreign assets and consider the possibility for the dollar to strengthen following further interest rate hikes. There is nothing more unfortunate than seeing one’s substantial additions to one’s portfolio fail due to weak foreign currencies.

The above discussion has brought home the importance of hedging to many investors who may not have realized that betting on a foreign market is not just about buying stocks or shares. ‘bonds in the country, but a lot to do with currency conversion.

Indeed, the current and potential strength of the dollar can erode the returns of countries with immense stock market potential but weak currencies. Therefore, to overcome these currency problems, it is better to opt for short-term currency-hedged ETFs.

For investors intrigued by this strategy, there are currently a few options on the market. Below, we briefly highlight some of the currency-hedged ETFs that beat the S&P 500 (down 0.8%) last week.

Last week’s ETF winners

WisdomTree Germany Hedged Equity Fund DXGE – Up 3.73%

WisdomTree Europe Hedged SmallCap Equity Fund EUSC – Up 2.9%

WisdomTree Europe Hedged Equity Fund HEDJ – Up 2.6%

Xtrackers MSCI Eurozone Hedged Equity ETF DBEZ – Up 2.5%

ETF Franklin FTSE Europe hedged FLEH – Up 2.5%

iShares Currency Hedged MSCI Eurozone ETF HEZU – Up 2.5%

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Invesco CurrencyShares Japanese Yen Trust (FXY): ETF Research Reports

Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports

Invesco CurrencyShares Euro Trust (FXE): ETF Research Reports

WisdomTree Europe Hedged Equity ETF (HEDJ): ETF Research Reports

WisdomTree Europe Hedged SmallCap Equity ETF (EUSC): ETF Research Reports

iShares Currency Hedged MSCI Eurozone ETF (HEZU): ETF Research Reports

Xtrackers MSCI Eurozone Hedged Equity ETF (DBEZ): ETF Research Reports

WisdomTree Emerging Currency Strategy ETF (CEW): ETF Research Reports

WisdomTree Germany Hedged Equity ETF (DXGE): ETF Research Reports

Franklin FTSE Europe Hedged ETF (FLEH): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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