Protect Yourself From Ugly Currencies

For a modest fee, these funds will strip foreign exchange risk out of your international portfolio.

- William Baldwin

British American Tobacco shares have had a nice run in the past year, rising from £37 to £46 in London. But American buyers did not enjoy the ride. Pounds lost value almost as fast as the shares gained it. Translated back into dollars, the stock went sideways.

Stack currency risk on top of equity risk and it’s no surprise that venturing overseas makes some investors seasick. But there is the option to take Dramamine. When you invest, you can make a side bet against the currency you’re investing in. You could couple a purchase of BAT or AstraZeneca or Shell with a short position in sterling. You could marry Toyota to a yen short and Roche to a Swiss franc short.

More realistically, unless you are investing a gigantic sum: Have a fund do the shorting for you. Eighty-nine exchange-traded funds have currency hedges built into their portfolios, and they account for $37 billion of the $456 billion in foreign-stock ETFs, according to a Morningstar tabulation.

Wisdom Tree Investments was the first in this business, with a hedged Japanese fund that dates to 2006. It’s now getting stiff competition from Power Shares, BlackRock’s iShares family and Deutsche Bank’s X-trackers line. Their sales pitch: Take some of the worry out of foreign portfolios by removing the hefty contribution to volatility (a fourth of it over the average five-year period) that comes from currency moves.