Currency Risk

Currency risk, also known as exchange rate risk, arises from the potential change in the value of one currency against another. This risk is particularly relevant for investors who hold assets denominated in foreign currencies, as fluctuations in exchange rates can significantly impact investment returns.

How ETFs Can Hedge Currency Risk

• Currency Hedged ETFs
  Currency hedged ETFs are designed specifically to mitigate currency risk. These ETFs hold foreign assets but use financial instruments like forward contracts and futures to offset the impact of currency fluctuations. For example, if an investor holds a currency-hedged ETF that tracks a European stock index, the ETF will hedge against changes in the euro-to-dollar exchange rate.
• Currency ETFs
  Currency ETFs invest directly in foreign currencies or in financial instruments linked to foreign currencies. Investors can use these ETFs to gain exposure to specific currencies or to hedge currency risk in their portfolios. For instance, if an investor is exposed to the euro through other investments, they might buy an ETF that shorts the euro to hedge against potential depreciation.
• Inverse Currency ETFs
  These ETFs are designed to profit from a decline in a particular currency relative to another. They can be used to hedge against the risk of a currency weakening. For example, an inverse euro ETF would increase in value if the euro depreciates against the dollar.

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