International currency fluctuations will impact investors’ foreign equity allocations, but investors can look to exchange-traded fund strategies with currency hedging to mitigate currency risk and provide a purer play on foreign exchange. underlying foreign markets.
In the next webcast, A strategy for thriving in a strong US dollar environment, Jason Chen, senior research analyst at DWS Research Institute, DWS, highlighted the impact of currencies on volatility. Currency fluctuations have a significant impact on portfolio volatility. In general, hedged international indices had lower volatility than unhedged indices. While unhedged investors enjoyed higher returns in some time periods, they also experienced higher volatility in most cases.
On the other hand, hedged investments can offer smoother long-term investments. For example, Chen pointed out that currency hedging has, on average, reduced volatility by 1.7% in the EAFE. Additionally, the maximum drawdown was worse for unhedged EAFE in 16 of the 21 calendar years, compared to currency hedged EAFE.
“Historically, currency hedging has led to lower volatility and fewer losses in a diversified portfolio,” Chen said.
To help investors access a range of currency-hedged international markets, DWS offers a suite of currency-hedged ETFs, including:
Craig Columbus, CEO of Columbus Macro, also helped outline currency movements in the forex markets. He noted that long-term mean reversion of the US dollar is not guaranteed and may occur outside of your investment horizon. Long-term currency movements are often unpredictable and can lead to errors in capital market assumptions. On the other hand, the cleanest way to capture a country’s relative valuation premium is to hedge currency effects. For example, hedged EAFE exposure can provide portfolio diversification benefits. Additionally, Columbus argued that a combination of hedged and unhedged holdings can yield optimal results.
Columbus pointed out that the Japanese yen currency recently hit a 24-year low against the US dollar due to a divergence between Federal Reserve policy and the Bank of Canada’s ultra-loose yield curve control. Japan. Recent global inflationary pressure has presented Japan with a unique opportunity to end deflation.
Meanwhile, Columbus added that the euro recently hit a two-decade low against the US dollar. The ECB also recently hiked rates for the first time in more than a decade, with the cycle of tightening consensus expectations expected to end at around 1.5% in 2023.
As we witness changes in foreign exchange markets, Columbus highlighted the potential impact on the portfolios of international investors. Specifically, currency movements have affected the MSCI EAFE 10-year returns for US investors. The index hedged against currency risk outperformed the local currency (positive hedging return). Moreover, the standard deviation was also lower for the hedged index. Columbus concluded that for US investors, unhedged currency exposure has tended to increase international equity volatility.
Brian Wright, chief investment officer at Columbus Macro, explained that at Columbus Macro they also used ETFs, like the Deutsche X-trackers MSCI EAFE High Dividend Yield Equity ETF (NYSEArca: HDEF) and the Xtrackers MSCI All World ex-US High Dividend Yield Equity ETF (NYSE Arca: HDAW), to diversify international exposure. The MSCI EAFE High Dividend Yield offers an attractive yield relative to its historical norm and also offers an attractive valuation relative to other global indices. The strategy offers exposure to international value stocks with a bias towards quality/profitability.
Financial advisors interested in learning more about currency-hedged investment strategies can watch the webcast here on demand.
