Currency Hedging ETFs; Why You Would Buy Them

While there is certainly some additional risk associated with Exchange Traded Funds that offer currency hedging, investors looking for international exposure need to consider currency hedging ETF's as a viable option.

I am not normally in favor of ETFs that increase investors risk by using sophisticated investment strategies which increase leverage or offer hedged protection. These products are 'offering' this added feature at increased cost to the investor and usually more so than that at rather elevated risk levels.

In most cases I would argue that if you need to hedge against something, than why even invest in that sector at all? When it comes to foreign equities, it is hard to ignore the developed markets like Europe and Asia. But, the big risk of investing in those countries today is how fluctuations in the currency will affect your returns.

If your investment increases in value by say 10%, but the U.S. dollar compared to that foreign currency increases by 10%, then you have not made a single dollar. Your entire investment gain was wiped out by the currency exchange rate changing. The opposite can also happen; if your asset declines in value, but so does the dollar, than you haven’t lost anything.

But there is also a time when this gets a little scary; let's say your investment declines by 10% and at the same time the U.S. dollar gains another 10% against the foreign currency which your investment was priced against.

Now you just lost 20%! And that is why you hedge.

You should look around and find which Exchange Traded Fund offers what you are looking for in an investment and has a fair expense ratio, solid amount of assets under management and has a proven track record. With that all in mind, let's take a look at a few of my current favorites.

It is hard to go wrong with just a standard European Equity index fund which of course has the currency hedge also in play. Something like the Wisdom Tree Europe Hedged Equity Fund (PACF:HEDJ) fits that bill very well. The ETF tracks an index of Eurozone dividend-paying companies. The fund carries an expense ratio of 0.58%, has more than $9.8 billion in assets under management and is hedged against the Euro, meaning this fund is designed to be owned by U.S. investors.

Or you could go with an Asia-Pacific ETF instead of the European one. Something like the O'Shares FTSE Asia Pacific Quality Dividend Hedged ETF (PACF:OAPH) which focuses on high quality dividend equities based in the Asian-Pacific market. OAPH has an expense ratio of 0.68%, 276 different holdings, but it only has $2.8 million in assets under management. Surprisingly though the fund has down fairly well, investors don’t seem to want to take on the risk associated with all of the Asia-Pacific markets.

That leads us to the more individually country specific hedged ETFs. Something like the iShares Currency Hedged MSCI German ETF (PACF:HEWG), which does exactly what it sounds like; it tracks an index of large and midcap German stocks and hedging out the currency exposure.

Or something like the iShares Currency Hedged MSCI United Kingdom ETF (PACF:HEWU) which does the same thing as the German ETF, but just for the U.K. These two funds carry expense ratios of 0.49% and 0.53%. The German fund has $914 million in assets under management while the U.K. fund has just $25 million. Part of that massive difference could be due to investor's fear of the Euro losing value more so than the pound.

But, perhaps the country specific funds are too narrow for you. Than perhaps the WisdomTree Dynamic Currency Hedged International Equity Fund (BATS:DDWM) is better. This ETF tracks an index of dividend-paying equities based in developed nations outside of the U.S. and Canada. It would give you exposure to nearly the whole world. It currently has an expense ratio of just 0.35%, assets under management of $458 million, and it currently has more than 748 different holdings.

While hedging against currency can be both good and bad, investors need to understand that it is not something they have to partake in, but that it is simply another option or tool in an investor's handbag.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: The author did not own shares of any equity mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.