ETFs that
employ a currency hedging strategy seek to eliminate all (or substantially reduce) the effects of foreign exchange rate changes.
Any time a rising Canadian dollar takes a bite out of foreign stock returns investors can feel tempted to use ETFs and index funds that
employ currency hedging, a strategy designed to protect you from the effects of a decline in the U.S. dollar and other foreign currencies.
For individuals buying foreign stocks,
employing a currency hedging strategy may be complex and cost - prohibitive.
As a result, portfolios that held international stocks without hedging away the currency risk did not lose as much as portfolios that
employed currency hedging.
Not exact matches
Hedge funds can invest in options or derivatives,
employ leverage, sell short or even trade
currencies, both domestic and foreign.
Ultimately, to understand the personal
currency exposure of your own investements, you have to not only understand which countries the stocks in the fund, or represented by the ETF are located in; you also have understand the
currency of the revenue and expenses of each of those companies, and finally you also have to understand any
hedging strateiges each of those companies are
employing.
For those looking to
hedge the
currency risk within their foreign stocks, ADRs are no substitute for strategies that actually
employ a specific
currency -
hedging program.
However, ETF investors looking to avoid the impact of
currency fluctuations will benefit from ETFs that conveniently
employ institutional
hedging techniques on a cost - effective basis.
Investors often consider
employing a
hedge when a foreign
currency is falling relative to an investor's home
currency but may decide to stay unhedged when a foreign
currency is strengthening on a relative basis.