Self Directed Investor Inc
SDI: "Empowering investors with ideas and education"
Symbol Lookup »  
Topics:ChinaETFsEarningsEconomyEnergyForexGoldIncomeLessonsIdeasTrading

  • Other news: News from PR Newswire
| More

How To Invest Overseas (Without Currency Risk)

Thu, Oct 25, 9:15 AM ET, by Michael Johnston

ETFs continue to open up the doors to international markets that were previously too difficult, or costly, to access for mainstream investors. While many have taken advantage of this by adding geographic diversity to their portfolios, few have considered the impact of currency fluctuations on their foreign, non-U.S. dollar denominated investments. Whether they realize it or not, investors with exposure to Brazilian or Japanese stocks, for example, are also exposed to the currency risks associated with the Brazilian real and the Japanese yen respectively. As such, Martin Kremenstein, Director and Chief Investment Officer of Deutsche Bank Commodity Services, recently took time to discuss the importance of currency exposure and how the lineup of currency-hedged ETFs offer a creative way to evade currency fluctuations without sacrificing international exposure [see King Dollar ETFdb Portfolio].

ETF Database (ETFdb): Can you explain the basic nuances associated with investing in foreign currency-denominated assets?

Martin Kremenstein (MK): When a U.S.-based investor invests in a foreign currency-denominated asset, like a foreign equity or bond, they are exposed to two sets of risk factors: the exposure to the asset itself (eg, Petrobras stock) and the exposure to the currency the asset is denominated in (in this case, Brazilian real). Both these risk factors drive return; for example, if a U.S. investor holds Petrobras stock and the stock does not move on a day, but the Brazilian real drops 10%, then that investor has lost 10%.

Currencies can have large fluctuations or move in long trends that do not necessarily correlate to the long term performance of the companies denominated in those currencies, especially when those companies are large, diversified, global firms. We think the majority of investors are seeking pure exposure to these companies in the same way they invest in domestic firms, and take the currency risk as an unknown or necessary bi-product. With currency hedged ETFs, they now have a choice.

ETFdb: How serious of a threat to bottom line performance does currency fluctuation pose for most investors?

MK: Currency fluctuations can make a huge difference to performance over time and in the short term can add a lot of unnecessary volatility to a portfolio. Consider this, roughly 100% of the outperformance of EAFE over the S&P 500 from 2001 to 2011 came from the devaluation of the dollar vs. developed market currencies. As the US Dollar starts to strengthen, investors will face a very large headwind on their returns from their foreign currency-denominated assets [see For ETF Investors, Currency Exposure Matters More Than You Might Think].

When investing in securities denominated in a foreign currency (or multiple foreign currencies as is the case with ETFs that invest in more than one foreign market), investors are exposed to fluctuations in both the value of the security in its local currency as well as to fluctuations in the exchange rate of that local currency relative to the investor’s home, or base, currency. Moves in the local currency relative to the U.S. Dollar can have an adverse impact on an investor's portfolio. Currency hedging eliminates the currency risk.

A hedged strategy, such as ours, enables investors to lock in the returns they made during the long periods of US Dollar weakness, while maintaining the same equity holdings. If the US dollar strengthens, they will not give back that return. Currency has increasingly been recognized as a separate asset whose pricing is driven by fundamentals that can differ from those which impact the underlying asset market.

ETFdb: How do your “currency-hedged” products go about achieving their objective? Why does it make sense to use the ETF wrapper for investors looking to purse this sort of strategy?

MK: The ETF invests in the underlying equities in the index and then uses one month FX forwards to hedge out the currency exposure.

The ETF wrapper gives the investors the trade in one convenient, low-cost wrapper. The products are designed to be used alongside their unhedged counterpart funds, as they differ only in the use of the currency hedge. For many investors, this is the only way to access foreign equities without taking on the currency risks. FX overlay managers are only available to larger investors. The only other option retail investors have to avoid currency risk is to not invest in foreign equities.

ETFdb: Would you consider “currency-hedged” ETFs as a core, or more tactical holding for long-term, buy-and-hold investors? Risk-tolerant ones?

MK: I think they belong in the core, alongside unhedged foreign equities. Investors should decide how much currency risk they want to take and adjust the hedged to unhedged positioning accordingly. We are giving investors the ability to manage their currency exposure and the returns from it in an active manner, rather than just taking it passively. The key, here, is that investors currently have unhedged currency risk at their core and may be exposed to more risk than they would ordinarily be comfortable. By using our hedged ETFs, investors can either eliminate this currency exposure or temper it by finding a hedging balance they are comfortable with.

ETFdb: Broadly speaking, what trends are you seeing develop in the currency market amid this low-rate environment?

MK: I think we have seen the long run decline of the dollar (it was on a downward track for 10 years, which is usual for a currency trend) and we are now in an environment where it is entirely possible for the dollar to strengthen against the rest of the currency universe. In terms of investor trends, the retail investor is becoming increasingly aware of the impact currencies have on their returns, and as such, we want them to be able to make the informed, conscious decision with regard to the risk they take.

Bottom Line: The decisions on whether to accept the risks associated with currency exposure can seriously impact bottom line returns. Investors looking to tap into overseas markets, but are wary of potentially volatile and unfavorable currency fluctuations, ought to take a closer look at Deutsche Bank’s lineup of currency-hedged ETFs as they offer a compelling strategy with all the benefits associated with the ETF structure.

Follow me on Twitter @SBojinov

[For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro]

Disclosure: No positions at time of writing.

 

Click here to read the original article on ETFdb.com.


SDI Glossary: "ETFs" Definition
SDI Glossary: "Risk" Definition
This Article's Word Cloud:   Brazilian   Currency   Dollar   ETFdb   ETFs   Investors   asset   associated   companies   core   currencies   currency   denominated   dollar   equities   exposed   exposure   fluctuations   foreign   from   have   hedged   impact   invest   investor   investors   large   local   long   make   market   more   only   performance   real   returns   risk   stock   take   term   that   their   they   think   this   those   time   trends   unhedged   with

| More

IFAS Crosses Above Key Moving Average Level
Fri, Nov 21, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the iShares Asia Developed Real Estate ETF (IFAS) crossed ...

EEHB Makes Bullish Cross Above Critical Moving Average
Fri, Nov 21, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the PowerShares S&P Emerging Markets High Beta Portfolio ETF ...

DGT Makes Bullish Cross Above Critical Moving Average
Fri, Nov 21, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the SPDR Global Dow ETF (DGT) crossed above their ...

XL Group Moves Up In Analyst Rankings, Passing Stryker
Fri, Nov 21, 11:54 AM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

RWX Makes Bullish Cross Above Critical Moving Average
Fri, Nov 21, 11:34 AM ET, by ETF Channel

In trading on Friday, shares of the SPDR Dow Jones International Real Estate ETF (RWX) ...

BLDRS Emerging Markets 50 ADR Index Fund Breaks Above 200-Day Moving Average - Bullish for ADRE
Fri, Nov 21, 11:34 AM ET, by ETF Channel

In trading on Friday, shares of the BLDRS Emerging Markets 50 ADR Index Fund ETF ...

Guggenheim Timber (CUT) Shares Cross Above 200 DMA
Fri, Nov 21, 11:34 AM ET, by ETF Channel

In trading on Friday, shares of the Guggenheim Timber ETF (CUT) crossed above their 200 ...

iShares Asia 50 Breaks Above 200-Day Moving Average - Bullish for AIA
Fri, Nov 21, 11:34 AM ET, by ETF Channel

In trading on Friday, shares of the iShares Asia 50 ETF (AIA) crossed above their ...

First Trust Materials AlphaDEX Fund (FXZ) Shares Cross Above 200 DMA
Fri, Nov 21, 11:34 AM ET, by ETF Channel

In trading on Friday, shares of the First Trust Materials AlphaDEX Fund ETF (FXZ) crossed ...

AXJL Makes Bullish Cross Above Critical Moving Average
Fri, Nov 21, 11:24 AM ET, by ETF Channel

In trading on Friday, shares of the Asia Pacific ex-Japan ETF (AXJL) crossed above their ...

JPP Crosses Above Key Moving Average Level
Fri, Nov 21, 11:24 AM ET, by ETF Channel

In trading on Friday, shares of the SPDR Russell/Nomura PRIME Japan ETF (JPP) crossed above ...

DRW Makes Bullish Cross Above Critical Moving Average
Fri, Nov 21, 11:24 AM ET, by ETF Channel

In trading on Friday, shares of the WisdomTree Global ex-U.S. Real Estate Fund ETF (DRW) ...

iShares iBoxx $ Investment Grade Corporate Bond ETF Experiences Big Inflow
Fri, Nov 21, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: LQD Exchange traded funds (ETFs) trade just like stocks, but ...

IWP, VRTX, MHFI, INTU: Large Inflows Detected at ETF
Fri, Nov 21, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IWP, VRTX, MHFI, INTU Exchange traded funds (ETFs) trade just ...

IWV, MA, HON, TWX: Large Inflows Detected at ETF
Fri, Nov 21, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IWV, MA, HON, TWX Exchange traded funds (ETFs) trade just ...

12.6% of XHB Holdings Seeing Recent Insider Buys
Fri, Nov 21, 9:54 AM ET, by ETF Channel

A look at the weighted underlying holdings of the SPDR S&P Homebuilders ETF (XHB) shows ...

First Trust RBA American Industrial Renaissance ETF -- Insider Buying Index Registering 15.6%
Fri, Nov 21, 9:54 AM ET, by ETF Channel

A look at the weighted underlying holdings of the First Trust RBA American Industrial Renaissance ...

AES Moves Up In Analyst Rankings, Passing TE Connectivity
Thu, Nov 20, 12:14 PM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

AGG: Large Inflows Detected at ETF
Thu, Nov 20, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: AGG Exchange traded funds (ETFs) trade just like stocks, but ...

Vanguard FTSE Developed Markets ETF Experiences Big Inflow
Thu, Nov 20, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: VEA, NSRGY, NVS, TM Exchange traded funds (ETFs) trade just ...

DIA, V, GS, IBM: Large Inflows Detected at ETF
Thu, Nov 20, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: DIA, V, GS, IBM Exchange traded funds (ETFs) trade just ...

EDZ Crosses Above Key Moving Average Level
Wed, Nov 19, 3:54 PM ET, by ETF Channel

In trading on Wednesday, shares of the Daily Emerging Markets Bear 3x Shares ETF (EDZ) ...

ConocoPhillips Takes Over #116 Spot From Mallinckrodt
Wed, Nov 19, 11:54 AM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

SMB Crosses Below Key Moving Average Level
Wed, Nov 19, 11:24 AM ET, by ETF Channel

In trading on Wednesday, shares of the Short Municipal Index ETF (SMB) crossed below their ...

SPDR Barclays Long Term Corporate Bond (LWC) Shares Cross Below 200 DMA
Wed, Nov 19, 11:24 AM ET, by ETF Channel

In trading on Wednesday, shares of the SPDR Barclays Long Term Corporate Bond ETF (LWC) ...

IYLD Makes Notable Cross Below Critical Moving Average
Wed, Nov 19, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the iShares Morningstar Multi-Asset Income ETF (IYLD) crossed below ...

AAXJ Makes Notable Cross Below Critical Moving Average
Wed, Nov 19, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the iShares MSCI All Country Asia ex Japan ETF ...

KRE, WAL, MBFI, ONB: Large Outflows Detected at ETF
Wed, Nov 19, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: KRE, WAL, MBFI, ONB Exchange traded funds (ETFs) trade just ...

PGX: Large Inflows Detected at ETF
Wed, Nov 19, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: PGX Exchange traded funds (ETFs) trade just like stocks, but ...

PPA, LMT, NOC, RTN: Large Inflows Detected at ETF
Wed, Nov 19, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: PPA, LMT, NOC, RTN Exchange traded funds (ETFs) trade just ...

FXG, STZ, HAIN, PPC: ETF Inflow Alert
Wed, Nov 19, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: FXG, STZ, HAIN, PPC Exchange traded funds (ETFs) trade just ...

ILF, ITUB, BBD, PBR.A: ETF Outflow Alert
Wed, Nov 19, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: ILF, ITUB, BBD, PBR.A Exchange traded funds (ETFs) trade just ...

13.1% of XBI Holdings Seeing Recent Insider Buys
Wed, Nov 19, 9:54 AM ET, by ETF Channel

A look at the weighted underlying holdings of the SPDR S&P Biotech ETF (XBI) shows ...

Shares of IGHG Now Oversold
Tue, Nov 18, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the Proshares Investment GradeInterest Rate Hedged ETF (IGHG) entered ...

AMPS Crosses Below Key Moving Average Level
Tue, Nov 18, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the iShares Utilities Bond ETF (AMPS) crossed below their ...

EEV Makes Notable Cross Below Critical Moving Average
Tue, Nov 18, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the Proshares UltraShort MSCI Emerging Markets ETF (EEV) crossed ...

MONY Crosses Above Key Moving Average Level
Tue, Nov 18, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the iShares Financials Bond ETF (MONY) crossed above their ...

Newfield Exploration Moves Up In Analyst Rankings, Passing Avago Technologies
Tue, Nov 18, 12:14 PM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

EIDO Makes Bullish Cross Above Critical Moving Average
Tue, Nov 18, 11:14 AM ET, by ETF Channel

In trading on Tuesday, shares of the iShares MSCI Indonesia ETF (EIDO) crossed above their ...

CBND Crosses Below Key Moving Average Level
Tue, Nov 18, 11:14 AM ET, by ETF Channel

In trading on Tuesday, shares of the SPDR Barclays Issuer Scored Corporate Bond ETF (CBND) ...

SPLV, CB, TRV, ACE: ETF Inflow Alert
Tue, Nov 18, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: SPLV, CB, TRV, ACE Exchange traded funds (ETFs) trade just ...

IVW, UNP, MMM, ABBV: Large Inflows Detected at ETF
Tue, Nov 18, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IVW, UNP, MMM, ABBV Exchange traded funds (ETFs) trade just ...

IDV: ETF Inflow Alert
Tue, Nov 18, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IDV Exchange traded funds (ETFs) trade just like stocks, but ...

iShares U.S. Medical Devices ETF Experiences Big Outflow
Tue, Nov 18, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IHI, TMO, COV, BAX Exchange traded funds (ETFs) trade just ...

10.2% of IESM Holdings Seeing Recent Insider Buys
Tue, Nov 18, 9:44 AM ET, by ETF Channel

A look at the weighted underlying holdings of the iShares Enhanced U.S. Small-Cap ETF (IESM) ...

16.2% of DIV Holdings Seeing Recent Insider Buys
Tue, Nov 18, 9:44 AM ET, by ETF Channel

A look at the weighted underlying holdings of the SuperDividend U.S. ETF (DIV) shows an ...

WisdomTree China Dividend ex-Financials Fund (CHXF) Shares Cross Below 200 DMA
Mon, Nov 17, 4:14 PM ET, by ETF Channel

In trading on Monday, shares of the WisdomTree China Dividend ex-Financials Fund ETF (CHXF) crossed ...

USMV, PEP, ABC, BDX: Large Inflows Detected at ETF
Mon, Nov 17, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: USMV, PEP, ABC, BDX Exchange traded funds (ETFs) trade just ...

IWN, RLJ, PB, LHO: ETF Inflow Alert
Mon, Nov 17, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: IWN, RLJ, PB, LHO Exchange traded funds (ETFs) trade just ...

Coca-Cola a Top Ranked SAFE Dividend Stock With 2.9% Yield (KO)
Mon, Nov 17, 8:14 AM ET, by ETF Channel

Coca-Cola Co (KO) has been named to the Dividend Channel ''S.A.F.E. 25'' list, signifying a ...

Related videos | all videos »
  More articles:  1 2 3 4 5 6 7 next »

ABOUT US »   ADVERTISE »   CONTACT US »   TERMS OF USE & PRIVACY POLICY »

How To Invest Overseas (Without Currency Risk) | Self Directed Investor | Copyright © 2008 - 2014, All Rights Reserved

Any ideas and opinions presented in Self Directed Investor content are for informational and educational purposes only, and do not reflect the opinions of BNK Invest, Inc. or any of its affiliates, subsidiaries or partners. In no way should any content contained herein be interpreted to represent trading or investment advice. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. All site visitors agree that under no circumstances will BNK Invest, Inc,. its subsidiaries, partners, officers, employees, affiliates, or agents be held liable for any loss or damage caused by your reliance on information obtained. Read Full Disclaimer.

SDI is associated with: ValueForum.com -- a subscription-based online social networking forum of over 1000 individual investors. | MarketNewsVideo.com -- videos appearing on SDI are produced by Market News Video. | TickerTech.com -- stock quote content appearing on SDI is at least 20 minutes delayed and is powered by Ticker Technologies. | GoldStockStrategist.com -- Edited by Scott V. Nystrom, PhD, Gold Stock Strategist provides analysis on gold mining companies.