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Currency-hedged ETFs are making a comeback due to the shift in monetary policy around the world that has brought volatility to foreign-exchange markets. In fact, most currency-hedged ETFs are outperforming their unhedged peers as the surging U.S. dollar is knocking down the returns of international investments.

This is because a strong greenback eats away foreign investment gains when repatriated in U.S. dollar terms, pushing them into the red even when international stocks are performing well. As such, the strength in the greenback is compelling investors to recycle their portfolios into currency-hedged ETFs.

Among the most popular currency-hedged ETFs, iShares Currency Hedged MSCI EAFE ETF (HEFA - Free Report), WisdomTree Japan Hedged Equity Fund (DXJ - Free Report), WisdomTree Europe Hedged Equity Index Fund (HEDJ - Free Report) and iShares Currency Hedged MSCI Eurozone ETF (HEZU - Free Report) could make for excellent plays in a rising dollar environment.

These funds look to strip out currency exposure to a foreign economy via the use of currency forwards or other instruments that bet against the non-dollar currency while offering exposure to foreign stocks.

Soaring Dollar

The U.S. dollar index against a basket of six major currencies, including the yen, sterling and the euro, is hovering near a two-decade high. In fact, the dollar scaled to a fresh 24-year high against the yen. Meanwhile, the euro and yen are trading at 20-year lows, and the British pound is at its lowest level against the dollar since 1985 after Bank of England Governor Andrew Bailey said that the bank would end its emergency support to pension companies.

The Fed’s aggressive tightening policy to fight inflation is driving the dollar higher. The central bank raised interest rates by 75 bps for the fourth consecutive time, which pushed the benchmark rate to 3.0-3.25%, the highest level since 2008. The central bank also signaled additional large rate hikes are on the way. Per Reuters, money markets are giving it a 92% chance that the Fed will hike its benchmark rate another 0.75 percentage points when it meets in November.

This has contrasted with Japan’s dovish monetary policy and Europe’s economic problems that are pushing the yen and euro down. Europe is heading for a recession in the challenging months, while the United States looks resilient.

ETFs in Focus

iShares Currency Hedged MSCI EAFE ETF (HEFA)

iShares Currency Hedged MSCI EAFE ETF targets the developed international stock market in Europe, Australasia, and the Far East with no currency risk. iShares Currency Hedged MSCI EAFE ETF tracks the MSCI EAFE 100% Hedged to USD Index.

The fund has AUM of $3.4 billion and trades in a solid volume of 708,000 shares. HEFA charges 35 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium-risk outlook.

WisdomTree Japan Hedged Equity Fund (DXJ)

With AUM of $2 billion, WisdomTree Japan Hedged Equity Fund targets the Japanese equity stock market without the currency risk by tracking the WisdomTree Japan Hedged Equity Index.

WisdomTree Japan Hedged Equity Fund trades in a solid volume of 475,000 shares per day and charges 48 bps in annual fees. It has a Zacks ETF Rank #3 with a Medium-risk outlook.

WisdomTree Europe Hedged Equity Index Fund (HEDJ)

WisdomTree Europe Hedged Equity Index Fund tracks the WisdomTree Europe Hedged Equity Index and offers exposure to the European market without any currency risk. The fund has AUM of $1.1 billion and sees an average daily volume of about 88,000 shares.

WisdomTree Europe Hedged Equity Index Fund charges 58 bps in annual fees and has a Zacks ETF Rank #3 with a Medium-risk outlook.

iShares Currency Hedged MSCI Eurozone ETF (HEZU)

iShares Currency Hedged MSCI Eurozone ETF seeks to reduce the impact of the euro, relative to the U.S. dollar, on an allocation to Eurozone equities. It provides broad exposure to a wide range of exporters and local Europe-focused companies that may benefit from the European Central Bank's stimulus policies by tracking the MSCI EMU 100% USD Hedged Index.

iShares Currency Hedged MSCI Eurozone ETF has accumulated $310.2 million in its asset base while charging 53 bps in annual fees. It trades in an average daily volume of 111,000 shares and has a Zacks ETF Rank #3 with a Medium-risk outlook.

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