Investing in Foreign Markets and US Dollar Risk (UUP, EEM, EFA)

Eric Mancini
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Posted on 11/17/09 at 9:28pm by Eric Mancini

The vast majority of 'diversified' investors have some exposure to equities outside of the United States. This is done to provide access to higher growth emerging markets, exposure to equities that are not 100% correlated with US markets, and possibly to hedge against the US Dollar.

However, recently owning foreign equities has become a levered bet (2x to 3x) against the US Dollar with the underlying 'country specific growth story’ a secondary factor in returns.

One may ask, "Is it possible to own foreign investments without betting against the dollar and obtaining only the country specific growth/income return?"

The answer is yes, but choices are somewhat limited. There are no ETFs currently offered that invest in foreign companies but then hedge the dollar exposure. Wisdomtree filed for 2 such ETFs back in March 2009 but to date none are trading.

In the mutual fund world there are a couple options including Tweedy's original Global Value (TBGVX) or Mutual European, and PIMCO International StocksPLUS TR Strategy (PIPAX).

An investor could also partially hedge himself by buying an unhedged foreign ETF or fund (Ishares Developed Markets (NYSE: EFA) or Ishares Emerging Markets (NYSE: EEM)) and then purchasing a long dollar ETF (Powershares US Dollar Bullish NYSE: UUP). This would not be a perfect hedge of course, since your currency hedge will not be foreign currency specific, but the combination of ETFs will dampen the currency effect on the investments. Wisdomtree does offer some country specific currency ETFs which could produce better hedges.

Overall it is a little talked about strategy that could prove very useful if the US Dollar doesn’t fizzle into oblivion.

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