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ETF Specialist

Currency-Hedged ETFs Can Serve as Core Holdings

But like all allocation decisions, it's best to stick to your plan.

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Currency-hedged exchange-traded funds continue to enjoy strong inflows in 2015. Through the first 11 months of the year, a net $45 billion flowed into these products, accounting for a significant slice of the net $209 billion of flows into international-equity funds and ETFs. Much of this flow can be attributed to those looking for a short-term trade as the U.S. dollar continues to strengthen. However, there are also investors who are starting to use these products as a long-term, strategic allocation. Most investors have unhedged currency exposure in their international-equity allocation, as most international-equity funds are not hedged. To temper this foreign-currency exposure (that is, the volatility from moving currencies), investors can replace unhedged international-equity funds with currency-hedged ETFs.

If you plan to use currency-hedged ETFs as part of your strategic allocation, determine how much of your international-equity allocation you want to hedge, and stick with it. It may be tempting to try to trade in and out of currency-hedged ETFs depending on which way the U.S. dollar is moving, but generally speaking, market-timing is not a sensible strategy for long-term investors.

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Patricia Oey does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.