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FYI: The hottest trend in the fast-growing market for exchange-traded funds is stripping out currency swings from overseas investments. GMO, the $120 billion investment house co-founded by the legendary Jeremy Grantham, lays out the case for why most investors shouldn’t bother in a recent white paper Regards, Ted http://blogs.barrons.com/focusonfunds/2015/04/14/granthams-gmo-skewers-currency-hedged-etfs/tab/print/
"What should most investors do? GMO’s Catherine LeGraw warns that currency hedging can create new risks.
“Recently, as assets have been flowing into currency hedged equity exchanged traded funds (ETFs), we worry that investors have observed the higher returns from hedged equities as the dollar has risen and concluded that currency hedging is the right thing to do.
Systematic currency hedged strategies (such as hedged ETFs) short currencies based on the stock’s listing currency. … We believe this is not an accurate representation of the currency exposure. In fact, by adding short currency positions, investors may be opening themselves up to new risks. Currency management is a useful tool when done for the right reasons: because of a high-conviction view, or a desire to mitigate an identified risk exposure. We caution that a simple currency hedging strategy may not achieve these objectives.”
In part, that’s because many overseas companies are multinational and not necessarily exposed to the currency swings of where their shares are listed:
“In the age of global business models, most large cap companies are not exposed purely to the currency that their stock is denominated in. For example, roughly half of U.K. stock market capitalization is comprised of companies whose business has minimal exposure to the United Kingdom; these companies simply decided to list in London. Shorting the British pound against a basket of U.K. stocks does not “hedge” currency exposure; it layers on a directional short currency position.”
GMO also takes issue with the argument that hedging currencies lowers volatility. She contends it does not.
“At the levels of non-U.S. equity exposure that most investors have in their portfolios, hedging doesn’t meaningfully reduce portfolio volatility even if it does reduce the volatility of the non-U.S. equities on a stand-alone basis.
By focusing on the impact of hedging on one area of the portfolio (international equities), investors may be missing the impact to the overall portfolio.”
>>>To the "bold" areas above, by me. Yup. One has to know what the intention and/or meaning of a particular investment is attempting to do.
Hell, healthcare will take a bang downward at some point in time, eh? One must pay attention to be an investor; deciding what they choose to do about/with risk and reward.
Comments
Thank you for this link.
The article noted:
"What should most investors do? GMO’s Catherine LeGraw warns that currency hedging can create new risks.
“Recently, as assets have been flowing into currency hedged equity exchanged traded funds (ETFs), we worry that investors have observed the higher returns from hedged equities as the dollar has risen and concluded that currency hedging is the right thing to do.
Systematic currency hedged strategies (such as hedged ETFs) short currencies based on the stock’s listing currency. … We believe this is not an accurate representation of the currency exposure. In fact, by adding short currency positions, investors may be opening themselves up to new risks. Currency management is a useful tool when done for the right reasons: because of a high-conviction view, or a desire to mitigate an identified risk exposure. We caution that a simple currency hedging strategy may not achieve these objectives.”
In part, that’s because many overseas companies are multinational and not necessarily exposed to the currency swings of where their shares are listed:
“In the age of global business models, most large cap companies are not exposed purely to the currency that their stock is denominated in. For example, roughly half of U.K. stock market capitalization is comprised of companies whose business has minimal exposure to the United Kingdom; these companies simply decided to list in London. Shorting the British pound against a basket of U.K. stocks does not “hedge” currency exposure; it layers on a directional short currency position.”
GMO also takes issue with the argument that hedging currencies lowers volatility. She contends it does not.
“At the levels of non-U.S. equity exposure that most investors have in their portfolios, hedging doesn’t meaningfully reduce portfolio volatility even if it does reduce the volatility of the non-U.S. equities on a stand-alone basis.
By focusing on the impact of hedging on one area of the portfolio (international equities), investors may be missing the impact to the overall portfolio.”
>>>To the "bold" areas above, by me. Yup. One has to know what the intention and/or meaning of a particular investment is attempting to do.
Hell, healthcare will take a bang downward at some point in time, eh? One must pay attention to be an investor; deciding what they choose to do about/with risk and reward.
Take care,
Catch