Although foreign stocks are important for diversifying your portfolio, currency swings can affect their performance. For instance, Americans who invest in Japanese shares when the dollar is weakening relative to the yen will see a boost in returns because investments in yen get translated into more greenbacks. But when the dollar is strengthening, as it has been recently, U.S.–based investors are likely to see their returns diminish. They may think it’s time to get out of Dodge (or Toyota, as it were).
Another solution: Take currency out of the equation. That is the goal of Deutsche X-trackers MSCI EAFE Hedged Equity (DBEF). The exchange-traded fund tracks the foreign-stock MSCI EAFE index but uses futures contracts to neutralize the impact of currency fluctuations.
With currency moves off the table, the ETF’s return is driven solely by the performance of its stock holdings. “You’re investing like a local,” says Deutsche ETF strategy head Dodd Kittsley. Over the past year, Hedged Equity has licked iShares MSCI EAFE ETF (EFA), which doesn’t hedge, by 8.6 percentage points.
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Not surprisingly, investors are flocking to currency-hedged funds. Assets in the Deutsche ETF have more than quintupled over the past year, to $1.3 billion. Just keep in mind that if currency trends reverse course, you may regret owning a fund that doesn’t benefit from a drop in the buck.
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