ETF’s With A Currency Hedge…Or Not? You Have To Nail This One…

By: Pete
Date posted: 11.05.2012 (4:00 am) | Write a Comment  (0 Comments)

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I’ve gotta admit, this one drives me insane. Selecting an ETF doesn’t take a rocket scientist and it’s not a month long process. But if you’re not going to take 10-20 minutes to make sure that the ETF you will count on for your retirement is tracking what you’re looking for, then you might as well go pay out those high management fees and end up paying tens of thousands of dollars (or a lot more) in fees. Why? Because it’s the core of building an ETF portfolio.

One Great Example

In almost any dividend portfolio, international assets will occupy a decent weight. Why? The top benefit is diversification which I would describe as being able to generate additional return for the same level of risk. It’s a no-brainer when you think about it. That does not mean you will always outperform someone who does not have international ETF’s. However, over long periods of time, you will end up a winner more often than not. It’s the same reason why most of us prefer to buy an ETF that tracks the S&P500 rather than buying 1 or 2 stocks that we have great belief in.

International markets react differently than domestic ones which creates the diversification. Another aspect though is the currency. If you hold an ETF that tracks Australian stocks, chances are that you’d also like to have exposure to the Australian dollar! Why? Same reason, it gives you more diversification than an Australian ETF that has a currency hedge.

If You’re Not Convinced Yet

Just in case you’re still unsure, I do have one more argument. Currency hedging is tricky for ETF’s and because of that fund managers have historically struggled with hedging correctly which has created more tracking error and more fees.

What Do You Hold?

Have you purchased any international ETF’s? If so, I hope you know if they are currency hedged or not? What do you generally prefer? I know that some investors disagree but I’m personally convinced that almost all investors should hold ETF’s that DO NOT currency hedge.


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