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By Patricia Oey | 01-09-2015 10:00 AM

Foreign-Stock Exposure Without the Currency Risk

Investors looking to top up their international-equity allocation without increasing their foreign-currency exposure might consider Deutsche X-trackers MSCI EAFE Hedged Equity ETF.

Patricia Oey: Over the last two years, U.S. equities have outperformed international equities. And for the U.S.-based investor, this performance gap was further augmented by the rising U.S. dollar in 2014. This is because in a rising U.S. dollar environment the value of foreign assets, when converted into U.S. dollars, falls. Investors who have not been rebalancing their portfolio will find that their exposure to international equities is now likely below their target weights.

Investors looking to top up that allocation may want to consider a strategy that hedges out the impact of foreign-currency movements. By hedging out foreign-currency exposure, a fund's returns are not negatively impacted should the U.S. dollar continue to appreciate against foreign currencies.

Central banks in the eurozone and Japan are doing everything they can to fight deflation and stagnating growth through measures such as aggressive quantitative easing and low rates. In the U.S., on the other hand, the economy is much healthier and this sets the stage for rising rates in the coming years. Over the last few months, these trends have helped support a strengthening dollar versus the euro and the yen.

One investment option is a currency-hedged ETF such as Deutsche X-trackers MSCI EAFE Hedged Equity (DBEF). This ETF tracks the MSCI EAFE Index, which is a cap-weighted index covering developed markets--excluding the U.S. and Canada. If this fund did not hedge its currency exposure, it would have a 30% exposure to the euro, a 21% exposure to the yen, and a 21% exposure to the British pound. This fund carries a low expense ratio of 35 basis points.

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