Currency Hedging When Investing in Developing & Emerging Markets

Many exchange-traded funds (ETFs) focusing on developing and emerging markets have lost value this year. For example, the iShares MSCI Emerging Markets ETF ( EEM A- ) is down 10% year-to-date through October 8. By comparison, the S&P 500 Index is down just 3% in the same time. Aside from fears of economic slowdowns in emerging markets such as China, one of the biggest reasons for the relative underperformance of emerging-market ETFs is the strengthening U.S. dollar. The U.S. dollar has risen sharply this year against a basket of most international currencies. This has amounted to a significant headwind for ETFs that focus on developing markets. As a result, investors should consider currency hedging when evaluating ETFs that invest in emerging markets. It is possible to purchase currency-hedged ETFs to help mitigate currency risk.