Managing Currency Risk In International ETF Portfolio

Dec. 07, 2014 6:06 PM ETBKF, DXJ, EWJ8 Comments
Marius Bausys profile picture
Marius Bausys


  • FX risk associated with international ETFs is frequently overlooked.
  • It is easy to identify and quantify currency exposures.
  • Investors should determine appropriate hedging strategy.

Investing in international markets has never been easier. The arrival of international ETFs has enabled investors to gain exposure to foreign stocks and bonds the same way as trading domestic securities. However, with the diversification benefit that international securities bring to a portfolio, there comes the currency risk as well. The latter is still little understood by a large number of investors and this article should shed some light on how to manage the FX risk in a portfolio that includes international ETFs. The three simple steps described below are a good start.

1. Identify the risk

The most important point is that the denomination currency of an ETF is almost irrelevant - it is the underlying securities that give rise to the currency risk. As an example, if a European investor buys iShares MSCI Japan ETF (EWJ), which is denominated in U.S. dollar ("USD"), 100% of the FX exposure is to the Japanese yen ("JPY") rather than the USD. This is simply due to the fact that the ETF has to convert USD to JPY before purchasing Japanese stocks.

All ETFs publicly disclose their geographic allocation, thus the first step is to check this data for each ETF in your portfolio. For instance, iShares MSCI BRIC ETF (BKF), which invests in four major emerging market economies, has 48.6% of its underlying securities denominated in Hong Kong dollars ("HKD"), 23.7% in Brazilian real ("BRL"), 17.3% in Indian rupee ("INR"), 7.9% Russian rouble ("RUB"), and 2.2% in U.S. dollars. From a U.S. investor's perspective, the HKD exposure can virtually be ignored as HKD has been pegged to USD since 1984. The 2.2% USD component can also be disregarded, which leaves BRL, INR and RUB exposures to be considered for hedging.

2. Quantify the risk

The next step is to aggregate all

This article was written by

Marius Bausys profile picture
I am an individual investor and entrepreneur based in London, United Kingdom. My primary focus is on efficient portfolio diversification, systematic trading strategies and tactical asset allocation. ETFs are my preferred investment instruments.I am also a founder a freely available portfolio risk analytics tool - make sure you check your portfolio as well!

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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