The Hedge of Least Regret

by: , Chief Investment Officer and Managing Director | IndexIQ

What Are the Benefits of Managing International Equity Currency Risk with a 50% Hedging Strategy?

The potential benefits of international equity investing include participation in the fortunes of many of today’s global industry leaders and greater portfolio diversification than can be derived by investing in U.S. securities alone. Approximately half of global equity market capitalization resides outside the U.S. as well as almost half of the top 100 firms by market capitalization. Still, many U.S. investors appear to be underweight international equities in their portfolio allocations.1

For those seeking exposure to international equities, it is important to understand how exchange rate movements can affect equity returns in these markets. Currency hedging offers a way to invest internationally, while managing against the risk a stronger U.S. dollar can impose on foreign-based equity returns. However, hedging can also reduce those returns when the U.S. dollar falls. History shows that the better-performing strategy can vary from year-to-year and is difficult to predict. What’s more, the best-performing strategy in one equity market might not be the best approach in another market during the same time period. In either case, whether investors utilize a fully hedged or non-hedged strategy, it is important to understand that they are effectively making a currency call that is inherently difficult to time.

Fortunately, there is an alternative to the all-or-nothing approaches many investors have historically taken to hedging currency exposure in their international portfolios. A balanced 50% currency-hedged portfolio may offer a reasonable alternative approach. In fact, our research shows that half-hedged portfolios reduce the potential risk of misreading extreme currency movements in either direction, while lowering the inherent volatility in certain key markets, offering a hedge of least regret across a broad range of currency scenarios. In addition, we believe an ETF structure offers an efficient and attractive vehicle to implement a 50% currency-hedged international equity strategy.


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The Benefits of Managing International Equity Currency Risk with a 50% Hedging Strategy

1. Morningstar, as of 9/30/17.

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

About Risk

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

This material is provided for educational purposes only and should not be construed as investment advice or an offer to sell or the solicitation of offers to buy any security. Opinions expressed herein are current opinions as of the date appearing in this material only.

Currency exchange rates can be very volatile and can change quickly and unpredictably. Therefore, the value of an investment may also go up or down quickly and unpredictably,and investors may lose money.

Foreign securities can be subject to greater risks than U.S. investments, including currency fluctuations, less liquid trading markets, greater price volatility, political and economic instability, less publicly available information, and changes in tax or currency laws or monetary policy. These risks are likely to be greater for emerging markets than in developed markets.

Consider the Funds’ investment objectives, risks, and charges and expenses carefully before investing. The prospectus and the statement of additional information include this and other relevant information about the Funds and are available by visiting IQetfs.comor calling 888-474-7725. Read the prospectus carefully before investing.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the IQ Hedge Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.


Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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