ETFs That Hedge Foreign-Currency Exposure

Includes: DXJ, EWJ, HEDJ
by: Tom Lydon

Some investors in mutual funds and exchange traded funds that target international stocks might not realize their returns can be influenced by how foreign currencies perform against the U.S. dollar.

Many ETFs that invest in overseas equities do not hedge their exposure to foreign currencies — one example is iShares MSCI Japan (NYSEArca: EWJ). Therefore, the ETF benefits when the yen strengthens against the U.S. dollar, and vice versa.

The dollar has been in a steady downtrend, so not hedging the currency exposure has provided a tailwind to many international ETFs.

However, some investors may want exposure to international stocks without worrying about currency fluctuations, or they may think the dollar is poised to rise.

Deutsche Bank recently listed five new ETFs linked to currency-hedged international indexes from MSCI.

“These ETFs are designed to provide investors direct exposure to international equity markets and aim to protect against fluctuations in value of the U.S. dollar and non-U.S. currencies,” Deutsche Bank said in a press release. The new ETFs cover Japan, Brazil, Canada, emerging markets and the MSCI EAFE, a broad developed markets index.

Additionally, WisdomTree manages WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and WisdomTree International Hedged Equity Fund (NYSEArca: HEDJ).