Jeremy Schwartz on going global with currency-hedged ETFs

The strength of the US dollar has become a growing concern for investors and has led to increased awareness and focus on the benefits of currency hedging when investing in foreign markets. Todd Rosenbluth, head of research at VettaFi, recently spoke with Jeremy Schwartz, global CIO of WisdomTree, about the performance of currency-hedged products compared to their unhedged counterparts in today’s markets.

“Foreign currencies depress unhedged ETF returns,” Schwartz explained. “If you’re an American investor, to buy a stock traded in euros, you have to first sell your dollars to buy euros to buy the stock, and then you have exposure to European stock trading and the currencies, so you have two sources of return and risk.

Schwartz goes on to describe how, in today’s global market, the MSCI EAFE (Europe, Australasia and Far East) index is down almost to the same degree that the S&P 500 fell in 2022, with more than half of its performance falling. by currencies. This means that despite a large outperformance of local market returns internationally – to the tune of around 10% against the S&P 500 – currencies are significantly reducing returns.

In a strong US dollar environment, Schwartz believes that foreign currencies fail to provide diversification, rather local markets provide the diversification, not their stocks plus the currency.

Currency hedging takes the anxiety out of advisors

Advisors are widely convinced that they should have a particular perspective on the dollar when investing in currency-hedged products, but it turns out that they are already expressing a position when investing in non-currency-hedged products. covered internationally.

“A lot of people think that, and they often tell me that they don’t want to appeal to the dollar. The irony is that they say they don’t want to go into currencies, but they’re perpetually short on the dollar and they’re perpetually long on the euro, long on the yen, long on the pound , forever,” Schwartz revealed.

Currency-hedged ETFs exist in a state of net neutrality with respect to currencies by removing the influence of the local currency and, in the current case, the influence of the strong dollar on international returns. It allows you to capture the performance of stocks and not be affected by upward or downward currency fluctuations.

“It’s a big shift in mindset, but again, because the choice of benchmark dictates what’s active and what’s not, you really have to think about how you compare , what risks you want,” Schwartz said. “If you just think stocks are cheap around the world and you want the stocks and you don’t know where the currencies are going, I think hedged ETFs are a really good solution for that.”

WisdomTree offers the WisdomTree Hedged Japanese Equity Fund (DXJ) which was one of the first ETFs launched by the company in 2006 and uses a dividend-weighted approach, making it a solid value play, especially in a market that has largely strayed from growth and value in 2022. DXJ also has an export slant which means it has a global perspective on the companies it invests in instead of just focusing on domestic companies.

“When you look at P/E ratios today, you get this basket of nine to 10 times earnings. It’s really one of the cheapest baskets in the world, so in a year where US rates are rising dramatically, Japan’s aren’t and so you have a very nice equity risk premium in Japan ,” Schwartz explained. “That’s probably one of the strongest arguments for DXJ is how cheap stocks are when interest rates are still stuck at zero.”

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