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ETF Specialist

A Dynamic Currency-Hedged Stock Strategy

This international-stock ETF places currency bets in an attempt to enhance performance.

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Currency hedging is usually an all-or-nothing decision for investors in foreign-stock exchange-traded funds. WisdomTree Dynamic Currency Hedged International Equity (DDWM) breaks this mold. It attempts to time its currency exposure with the help of three well-established trading signals: interest-rate differentials (carry), momentum, and value (measured by a currency's deviation from purchasing-power parity). Although this fund tracks an index, its currency overlay resembles an active quantitative strategy. Its currency bets will likely add up to a small performance edge over unhedged and fully hedged alternatives.

But this fund isn't for everyone. Its risk profile will fluctuate over time along with its hedging activity, which could make it more difficult to manage portfolio risk. And like most currency-hedged funds, it may incur higher transaction costs than its unhedged peers. Before considering this fund, it is necessary to determine whether it makes sense to hedge currency risk at all. The answer depends on the investor.

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