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Do You Want Currency Risk in Your Bond Fund?

The cost is often higher volatility.

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A version of this article originally appeared in the March 2017 edition of Morningstar FundInvestor.

The past few years have been tough for bond funds with sizable non-U.S. dollar currency exposures. Relative to other developed-markets currencies, the U.S. dollar has mostly been on a winning streak since 2012. And although many emerging-markets currencies bounced back versus the greenback in 2016, that resurgence hasn’t made up for the precipitous depreciation many experienced during the commodity sell-off of 2014 and 2015. For the five years ended Jan. 31, 2017, the unhedged Bloomberg Barclays Global Aggregate Bond Index--which has sizable exposures to the euro and Japanese yen, along with a smattering of other currencies--delivered a paltry annualized gain of just 0.1%, much less than the 3.3% produced by the index’s U.S. dollar-hedged version.

Miriam Sjoblom does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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