How do macro events and hedged equity ETFs relate?
Recently, we saw the Greek debt crisis unfold in Europe, which affected the entire European economy. Its impact was even prominent in the movement of the US dollar and the euro exchange rate. This has largely affected the stocks of European companies like Anheuser-Busch Inbev (BUD), HSBC Holdings (HSBC), and Sanofi (SNY). So it’s always advisable to invest in a currency-hedged investments when investing in foreign markets.
The Volatility S&P 500 (VIX) is a volatility-tracking index of the US market. The ProShares VIX Short-Term Futures (VIXY) serves the same purpose by tracking the performance of the S&P 500 VIX Short-Term Futures Index. Any macro event adversely affects the global markets, and you can see this effect in the respective markets’ volatility indexes. During the Greek debt crisis, volatility in the United States had risen a lot, increasing currency risk. You can see that the fluctuations in the WisdomTree Europe Hedged Equity ETF (HEDJ) and the Deutsche X-trackers MSCI Europe Hedged Equity ETF (DBEU) have been narrower than the US market’s volatility. So currency-hedged investments prove to be a safer bet in times of increased volatility.
The Japanese yen’s depreciation has benefitted many export-driven companies, like Honda Motor (HMC), Canon (CAJ), and Toyota Motor (TM). However, as we explained in this series, if an investment in foreign currency is unhedged, a fall in the value of foreign currency poses a risk to investors. So the Japan hedged equity ETFs DXJ and DBJP give higher returns relative to unhedged investments in this scenario.
For more analysis on Japan’s equity market and currency hedging, visit our series Can Japan’s Stock Market Sustain Such Growth?