ETF Specialist

Hedging Currency Risk Comes With Costs

Daniel Sotiroff

One of the drawbacks that comes with investing in foreign stocks is their higher volatility relative to domestic stocks. From January 2000 through June 2017, a U.S.-based investor holding a fund that simply tracked the MSCI United Kingdom Index weathered a standard deviation of 16.8%. That investor's counterpart in London, who owned shares in a similar fund, tracking the same index, experienced a standard deviation of only 13.8% during the same period.

Same index, but different volatility? There's some nuance here. The U.S. and U.K. indexes are not exactly the same. The former is denominated in dollars, the latter in pounds. And the source of the extra volatility borne by the U.S. investor was a direct result of fluctuating foreign exchange rates.

Daniel Sotiroff has a position in the following securities mentioned above: SCHB VEA. Find out about Morningstar's editorial policies.