Going long on stocks anywhere might be a risky move at this point in time, but if you’re going to do it then you might as well use a currency-hedged exchange-traded fund (ETF). These ETFs have consistently outperformed their peers, which has everything to do with a strong U.S. dollar. Back in 2013, the Japanese yen weakened against the dollar, followed by the euro in 2014. And now it’s possible that the Federal Reserve will raise rates at some point this year, which would make currency-hedged ETFs even more appealing – at least compared to their peers.
When you look at the charts below, you will notice that price appreciation has been higher for the currency-hedged ETFs compared to their counterparts. Their dividend yields are also higher.
Europe ETFs
Like many other central banks around the world, the European Central Bank (ECB) has been fighting against deflation. This can lead to rising equities, but it won’t be sustainable. Given the current scenario, this environment is best left for professional traders. In regards to ETF comparisons, the only advantage for the non-hedged version is more liquidity, but that should not be a determining factor in this case considering the vast difference in performance and dividend yield.
The Deutsche X-trackers MSCI Europe Hedged Equity ETF (DBEU) tracks the MSCI Europe U.S. Dollar Hedged Index and the Vanguard FTSE Europe ETF (VGK) tracks the FTSE Developed Europe Index.
| Net Assets | Avg. Trading Volume | Dividend Yield | 1-Year Performance | Expense Ratio | |
| DBEU | $2.84 billion | 997,975 | 7.50% | 0.65% | 0.45% |
| VGK | $21.65 billion | 4,697,390 | 3.17% | -6.47% | 0.12% |
DBEU, the currency-hedged ETF, is a clear winner.
Japan ETFs
Abenomics started out with a bang. That’s what happens when you print money at unfathomable rates. But, as always, spending money and creating more debt in an effort to solve an economic problem is not going to lead to sustainably positive results. While all the focus has been on China’s overleveraged economy – and for good reason – not many people talk about Japan, which had a debt-to-GDP ratio of 230% in 2014. That’s not quite as high as China, but it’s close. The Nikkei has been on fire over the past several years, but it won’t last. Invest with caution.
The WisdomTree Japan Hedged Equity ETF (DXJ) tracks the performance of the WisdomTree Japan Hedged Equity Index and the iShares MSCI Japan (EWJ) tracks the performance of the MSCI Japan Index.
| Net Assets | Avg. Trading Volume | Dividend Yield | 1-Year Performance | Expense Ratio | |
| DXJ | $18.03 billion | 4,969,650 | 1.16% | 11.76% | 0.49% |
| EWJ | $20.19 billion | 28,642,800 | 1.02% | 5.97% | 0.48% |
DXJ, the currency-hedged ETF, is a clear winner.
MSCI EAFE Index
This index is designed to measure international equity performance excluding the U.S. and Canada. It’s a broad approach to international exposure. Given global debt levels, this would also be a risky investment.
The Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF) tracks the performance of the MSCI EAFE U.S. Dollar Hedged Index and the iShares MSCI EAFE (EFA) tracks the performance of the MSCI EAFE Index.
| Net Assets | Avg. Trading Volume | Dividend Yield | 1-Year Performance | Expense Ratio | |
| DBEF | $13.58 billion | 4,060,700 | 6.02% | 3.74% | 0.35% |
| EFA | $61.43 billion | 17,873,600 | 2.61% | -6.00% | 0.33% |
DBEF, the currency-hedged ETF, is a clear winner.
The Bottom Line
If you’re going to invest overseas with an ETF, you should absolutely consider the currency-hedged version first. On a relative basis, this is no contest right now given the continued strength of the U.S. dollar. The biggest con for currency-hedged ETFs, and it’s a big one, is that this isn’t likely to be the best time to invest in equities. But that decision should be based on your own research and conclusions
