How to Hedge Euro Currency Risk With ETFs

Includes: DXJ, HEDJ
by: Tom Lydon

When you’re investing internationally, you’re betting on both equities and the local currency, too. That means Europe ETFs may be taking a bigger hit that you might expect. With ETFs, though, you can hedge that currency risk.

The declining European stock market has been slapping equities around, while the weakness of the euro currency is finishing them off. Matt Hougan for Index Universe reminds us that total returns are the sum of market returns plus or minus currency returns.

Any international equity investment is not only a bet on the market of the subject country, it is also a bet on the currency. Usually, market returns overwhelm any adverse impact of currency devaluation, but that hasn’t been the case recently with Europe and the euro falling in lockstep.

There are two ETFs to help hedge an international country investment; both funds are from WisdomTree (WSDT.PK). They can help hedge currency risk out of a portfolio by giving you pure exposure to the local returns of the benchmark indexes. This feature is especially useful in this climate.

  • WisdomTree International Hedged Equity ETF (NYSEARCA:HEDJ): This fund is two-thirds Europe (the rest is allocated to Japan, Australia, China and elsewhere in Asia).

  • WisdomTree Japan Hedged Equity ETF (NYSEARCA:DXJ)

Tisha Guerrero contributed to this article.

Disclosure: None