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Clipped: Foreign funds that ‘hedge’ against currencies lag

By Stan Choe

Associated Press

NEW YORK — Foreign-stock funds have been some of this year’s biggest winners, but many investors aren’t feeling the full benefit.

When buying a foreign-stock fund, investors increasingly have two options: One insulates investors from the swings in returns that can be caused by shifts in the dollar’s value against the euro, yen and other currencies. These are funds that “hedge” against currencies, while the other group lets investors feel their full effect.

Coming into this year, with Republicans fully in charge of Washington, expectations were for the dollar to build on a postelection rally, leading many investors to see hedging as the wiser strategy. That turned out to be wrong. Those who tried to time the market by switching into currency-hedged funds missed out on some of the best gains so far this year.

Consider the WisdomTree Europe Hedged Equity fund, an exchange-traded fund that owns Anheuser-Busch InBev, Telefonica and other European stocks. It also invests in the futures market to neutralize the effects of the euro’s movement against the dollar.

The fund jumped 6.6 percent between Election Day and the end of 2016, part of a worldwide rally for stocks. And its returns towered over European stock funds that didn’t hedge against the dollar’s moves versus the euro.

That’s because the dollar was in the midst of a strong rally, following the big electoral win for Donald Trump and the Republicans. The thinking was that Washington would enact policies that would lead to stronger U.S. economic growth and higher interest rates. The dollar jumped more than 10 percent against the Japanese yen within a couple months of Election Day, and close to 6 percent against the euro.

As a result, each euro was worth fewer dollars at the end of the year. So, while European stocks rose strongly in euro terms, they had a more lackluster move for investors counting in dollars. The iShares MSCI Eurozone ETF, for example, does not hedge currencies, and its gain from Election Day to the end of the year was only about a quarter of the WisdomTree Europe Hedged Equity fund’s.

The two ETFs track different indexes, so they’ll usually have differing returns.

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