Intl Funds with Currency Hedge - Good or dumb?

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RenoJay
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Intl Funds with Currency Hedge - Good or dumb?

Post by RenoJay »

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.
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Taylor Larimore
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Re: Intl Funds with Currency Hedge - Good or dumb?

Post by Taylor Larimore »

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
"Simplicity is the master key to financial success." -- Jack Bogle
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RenoJay
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Re: Intl Funds with Currency Hedge - Good or dumb?

Post by RenoJay »

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.)
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jhfenton
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Re: Intl Funds with Currency Hedge - Good or dumb?

Post by jhfenton »

Thanks, Taylor.

I believe that this was supposed to be Taylor's second link:

Currency management: Considerations for the equity hedging decision
lack_ey
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Re: Intl Funds with Currency Hedge - Good or dumb?

Post by lack_ey »

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:
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.
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.
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Taylor Larimore
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Re: Intl Funds with Currency Hedge - Good or dumb?

Post by Taylor Larimore »

RenoJay:

I edited my post.

jhfenton:

Thank you for the correction.

Best wishes.
Tau;pr
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RenoJay
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Re: Intl Funds with Currency Hedge - Good or dumb?

Post by RenoJay »

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!
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ogd
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Re: Intl Funds with Currency Hedge - Good or dumb?

Post by ogd »

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!
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.

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.
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Re: Intl Funds with Currency Hedge - Good or dumb?

Post by Waba »

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.
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