Rising Dollar Pinches International Stock ETF Returns

Investors should think about currencies again.

Senior ETF Analyst
Reviewed by: etf.com Staff
Edited by: Ron Day

The U.S. dollar is back in the headlines.  

Stubbornly high inflation has pushed rates in the U.S. up relative to rates in other countries, lending support to the greenback.  

That has investors thinking about currency impacts again. A stronger dollar makes U.S. exporters less competitive. It makes profits generated overseas less valuable when converted back into dollars. It makes dollar-denominated debt more burdensome for foreign borrowers. And so on.

There are a host of effects from the strong dollar that investors should consider. Perhaps the most straightforward, however, is the impact that the rising dollar has on international stock ETFs.

When the dollar rises, stocks held by those exchange-traded funds are worth less—all else equal. For instance, a stock that trades for 150 yen is worth $1 when the dollar-yen exchange rate is 150. But when that exchange rate moves to 155, suddenly the stock is worth less than a buck.

For investors in international equity ETFs, this can drag down returns.  

Affects on Japanese-Focused ETFs

This year, the Japanese yen has moved lower by nearly 10% compared to the U.S. dollar. That’s subtracted nearly 1000 basis points from the returns of iShares MSCI Japan ETF (EWJ), which is up less than 5% this year.

Fortunately, ETF investors have the option to hedge currency exposures if they choose. The hedged version of EWJ, the iShares Currency Hedged MSCI Japan ETF (HEWJ), is up 16% year-to-date.  

Another currency-hedged ETF, the WisdomTree Japan Hedged Equity Fund (DXJ), which holds a basket of stocks that benefit from a weaker yen, is up even more—21%.  

Of course, few investors can accurately time currency moves—especially over the short-term. But that doesn’t change the fact that, whether consciously or not, investors in international stock ETFs are making a bet on where the dollar is headed. 

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.