I received quite a bit of interesting comments from readers of my article “We're All Currency Traders Now” this past weekend, so I thought it would be worth putting a follow-up piece. I sincerely believe that the average investor underestimates the impact currency fluctuations have on international equity ETFs.
Unless the ETF specifically hedges, a purchase in the MSCI Australia Index Fund ETF (Symbol: EWA), MSCI South Africa Index ETF (Symbol: EZA), MSCI EAFE ETF (Symbol: EFA) or the MSCI Mexico Index ETF (Symbol: EWW) is also a purchase of the underlying currencies of those countries, and short the U.S. Dollar.
Using Rydex's CurrencyShares ETFs as proxy for each ETF's underlying country currency, I calculated the Year-to-Date correlations of the Currency ETFs to the respective International Equity ETF. Correlations can tell us how close the relationship is between two variables. The closer the correlation is to 1, the more likely the two variables move together.
ETF Pair Correlation
FXA:EWA 0.82
FXE:EFA 0.84
SZR:EZA 0.97
FXM:EWW 0.95
The correlations have been significantly high all year, which emphasizes my earlier point that investing in an international stock fund ETF also means you're shorting the U.S. Dollar to go long the foreign currency at the same time.
Disclosure: The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing.
