The iShares Russell 1000 Pure U.S. Revenue ETF (AMCA), which hardly holds any exporters, only focusing on stocks of companies that derive 85% or more of their revenue from the U.S., recently began outperforming the S&P 500. It’s not by much, but if the buck strengthens even more, especially as trade war concerns persist, that could fuel further outperformance in AMCA.
Similarly, small cap stocks, such as those held in the iShares Russell 2000 ETF (IWM) tend to have less overseas exposure than the large cap stocks held in the SPDR S&P 500 ETF Trust (SPY). That hasn’t really helped IWM this year—it’s underperforming SPY by a tad—but it could if the dollar becomes a bigger factor.
YTD Returns For SPY, IWM, AMCA
Another area where currencies play a big part is with international equities. Anyone invested in foreign stocks is making at least a tacit bet on currency movements.
For example, the returns for a vanilla, unhedged position in German stocks in a U.S. investor’s portfolio will be influenced both by the performance of the underlying equities and the performance of the euro against the U.S. dollar.
Investors can hedge that risk with a plethora of currency-hedged ETFs available on the market, including the Xtrackers MSCI EAFE Hedged Equity ETF (DBEF), the WisdomTree Japan Hedged Equity Fund (DXJ), the WisdomTree Europe Hedged Equity Fund (HEDJ) and the iShares Currency Hedged MSCI EAFE ETF (HEFA).
Currency-hedged products tend to outperform their vanilla counterparts when the dollar is climbing (and vice versa).
However, keep in mind that it doesn’t always make sense to hedge currency risk, even when you have a strong view on a particular currency. In some cases, the cost to hedge is prohibitively expensive, such as when hedging currencies with high interest rates (e.g., emerging market currencies).