Intl Funds with Currency Hedge - Good or dumb?
Intl Funds with Currency Hedge - Good or dumb?
Hi,
I apologize if this topic has been covered, but I haven't been to BH in a while. What are the BogleHeads' ideas about owning international fund/ETFs that hedge currency risk vs. just owning the funds that have both the equity risk AND the currency risk. (I'm a US-based investor.) Thanks.
I apologize if this topic has been covered, but I haven't been to BH in a while. What are the BogleHeads' ideas about owning international fund/ETFs that hedge currency risk vs. just owning the funds that have both the equity risk AND the currency risk. (I'm a US-based investor.) Thanks.
- Taylor Larimore
- Posts: 32842
- Joined: Tue Feb 27, 2007 7:09 pm
- Location: Miami FL
Re: Intl Funds with Currency Hedge - Good or dumb?
RenoJay:
Vanguard Research favors currency hedging for international bond funds and unhedged international equity funds:
Understanding the ‘hedge return’: The impact of currency hedging in foreign bonds
Currency management: Considerations for the equity hedging decision
Best wishes.
Taylor
Vanguard Research favors currency hedging for international bond funds and unhedged international equity funds:
Understanding the ‘hedge return’: The impact of currency hedging in foreign bonds
Currency management: Considerations for the equity hedging decision
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Re: Intl Funds with Currency Hedge - Good or dumb?
Taylor, thanks so much. I clicked both links, however, they both went to the article about bonds. Was there a different link for equities? (Which is what I'm interested in.)
Re: Intl Funds with Currency Hedge - Good or dumb?
Thanks, Taylor.
I believe that this was supposed to be Taylor's second link:
Currency management: Considerations for the equity hedging decision
I believe that this was supposed to be Taylor's second link:
Currency management: Considerations for the equity hedging decision
Re: Intl Funds with Currency Hedge - Good or dumb?
Vanguard's take is that little benefit is seen in practice when done for equities, so they generally don't do it. That said, their global minimum volatility fund does hedge currency.
I haven't much seen evidence and don't have an informed opinion on the matter. However, I will say that this quote from the conclusion is interesting:
I haven't much seen evidence and don't have an informed opinion on the matter. However, I will say that this quote from the conclusion is interesting:
My impression is that recent fund inflows to the HEDJ ETF (Europe equities with Euro exposure hedged) and similar are primarily a play on enhancing returns.n addition, we are mindful that while investors often talk about currency management for risk-control reasons, they frequently tend to evaluate the effectiveness of a currency strategy in terms of its impact on overall return, not portfolio risk. There is a clear difference between a currency strategy undertaken for volatility management and a program designed to enhance returns by forecasting future exchange-rate movements.
- Taylor Larimore
- Posts: 32842
- Joined: Tue Feb 27, 2007 7:09 pm
- Location: Miami FL
Re: Intl Funds with Currency Hedge - Good or dumb?
RenoJay:
I edited my post.
jhfenton:
Thank you for the correction.
Best wishes.
Tau;pr
I edited my post.
jhfenton:
Thank you for the correction.
Best wishes.
Tau;pr
"Simplicity is the master key to financial success." -- Jack Bogle
Re: Intl Funds with Currency Hedge - Good or dumb?
Thanks. I skimmed the article and it seems to be saying not waste one's effort on currency hedging for equities; just let the pieces fall where they may. So no work for me to do! Yay!
Re: Intl Funds with Currency Hedge - Good or dumb?
If you want to think about the underlying reasons, they have to do with equities having built-in hedges against currency risk, not completely, but to a significant degree. A few that come to mind: 1) sales in other countries, e.g. Apple vs Samsung are hardly distinguishable wrt USD / won, though other companies are more concentrated; 2) stocks are less sensitive to internal inflation, since their product prices should go up accordingly; 3) stocks tend to benefit from currency depreciation even without inflation, as they are more competitive when exporting or vs imports.RenoJay wrote:Thanks. I skimmed the article and it seems to be saying not waste one's effort on currency hedging for equities; just let the pieces fall where they may. So no work for me to do! Yay!
By contrast, with bonds all you have is a set of promises to pay X euros on Y date. If those X euros are worth 50% less dollars, tough luck. Even if the issuing company does better as a result, you gain very little from the credit improvement vs currency loss. In the case of safe government bonds, nothing at all.
To this you add the observation that the volatility of stocks is intrinsically higher, so the same currency volatility is a smaller component than with bonds.
Re: Intl Funds with Currency Hedge - Good or dumb?
WisdomTree pitch on the matter: http://www.wisdomtree.com/resource-libr ... P-1652.pdf
In cases where the hedging can be done at little to no cost it makes a lot of sense to me to remove the uncompensated volatility due to currency fluctuations from my foreign investments.
In cases where the hedging can be done at little to no cost it makes a lot of sense to me to remove the uncompensated volatility due to currency fluctuations from my foreign investments.