The currency factor for International ETFs (discusses EWP, EWU, EFA, PGJ, FXI)

Currency differentials always present unique challenges for investing internationally, writes David Fry, founder and publisher of The ETF Digest. Sophisticated institutional investors know when investing overseas they must deal with both currency and conventional market risk. Most know they can hedge their currency exposure through the futures and inter-bank markets. Retail investors have fewer choices—hence the need for currency ETFs. 

European investors are more ambidextrous in currency dealings. Prior to the Euro's introduction, living and working in Europe required knowledge, and an ability to think in terms of different currencies. Retail US investors don’t have experience in such matters and therefore have remained dollar oriented. 

Over the past year we’ve seen how currency valuations can enhance or diminish investment returns.  In 2004, some of the best performing markets for US investors were in Europe. At The ETF Digest, we profited by receiving the double-benefit of rising European indexes and a falling dollar. In 2005, good performance in European indexes hasn’t been realized by US Dollar investors since the Euro currency has reversed course and is now declining.

I believe that now we’re seeing hints of potential currency benefits for US investors in some China-based US market ETFs like PGJ, and FXI. The widely discussed revaluation of the Chinese Yuan seems already anticipated by some investors.