Summary

• A vital part of total return on foreign investments is the currency performance.
• If you think the dollar is in a bull market, it could eat away at the performance of your overseas investment.
• There are numerous ETFs that hedge out the currency risk.

The S&P 500 edged to a new intra-session high on lucky, Friday the 13th. However, it has lagged behind many of the other DM equity markets. When investing in own currency, total return is straight forward. It is the capital appreciation (or loss) and the income stream (dividend or coupon). When investing in foreign instruments, there is a third factor, and that is the currency.

It is important, because if one has a portfolio of global bonds, the variability of the currency could account for roughly 2/3 of the total return over time. The currency component on a portfolio of international stocks could account for 1/3 of the total return over time.

When one’s currency is weak, an investment in foreign markets earns from the appreciation of the local currency. When one’s currency is in an appreciating phase, investing overseas possesses challenges in managing the currency exposure.

The Great Graphic below shows several of the major equity markets’ performance this year indexed, so you can see the relative performance on a single scale.

• White — US 1.6%
• Yellow — Australia 8.6%
• Orange — Japan 2.9%
• Pink — France 11.4%
• Green — Canada 4.6%
• Red — Germany 12.3%
• Blue — UK 4.7%

Now consider the currency moves. The Australian dollar is off nearly 5% since the start of the year, more than halving the local return. The 6.7% depreciation of the Canadian dollar more than offset the 4.6% advance of the stock market. The strong performance of German and French equities is dulled by the almost 6% depreciation of the euro. The FTSE’s 4.7% gain is slimmed by the 1.1% decline in the pound. Japan’s return has been enhanced by a nearly 1% appreciation of the yen.

I accept the principle of diversification, but because I think the dollar’s bull move has several quarters to run, and in terms of magnitude, think the move is 1/3-1/2 complete, I have been drawn to ETFs that hedge the currency risk. There are numerous ETFs that do this and more are being listed. This is not meant as an advice for anyone, just sharing how I try to combine my dollar outlook with my own investing.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.