As part of a diversified portfolio, advisors will include international exposure, but they will also come up against currency risks associated with the fluctuating Forex market. Nevertheless, exchange traded fund investors can now track a few foreign markets without having to worry about the negative effects of a depreciating local currency.

When investing in foreign securities denominated in their respective local currencies, advisors have to take into account the potential risk that the currency can depreciate against the U.S. dollar. If the local currency depreciates, the advisor would realize lower returns when converting the weaker foreign currency-denominated investment into U.S. dollars. Recently, more are starting to weigh the effects of a strengthening dollar once the Fed does decide to cut back on its quantitative easing plan or raise interest rates in the future.

WisdomTree and Deutsche Bank have engineered products that specifically help investors capture overseas exposure while hedging against dips in their local currencies. This type of strategy has helped investors take a more unbiased approach toward foreign markets, but these equity-hedged ETFs have also allowed some to generate higher returns as they capitalize on the hedge.

“We and DB have the same goals: avoid currency impact and get local market return,” WisdomTree's Director of Research, Jeremy Schwartz said in an interview. “The natural starting point doesn’t have to be 100% exposed to currency. You want international equity exposure first. Currency is secondary.”

Japan
For instance, one of the most popular ETFs of the year include the Japan hedged-equity strategies WisdomTree Japan Hedged Equity Fund (DXJ) and db X-trackers MSCI Japan Hedged Equity Fund (DBJP). Both track a basket of Japanese equities but hedge against exposure to fluctuations between the U.S. dollar and a depreciating Japanese yen.

The Japanese markets surged beginning November 2012 after newly elected Prime Minister Shinzo Abe pushed for aggressive monetary policies and fiscal stimulus. The Bank of Japan adopted a 2% inflation target and started a quantitative easing program to jump start the stagnating economy.

Recently, Abe’s ruling block won a majority of the upper house elections, giving the party control of both chambers of parliament and providing Abe with the leverage to proceed with the “third arrow” in his broader economic reforms, including devaluing the yen.

Schwartz explained that the “BOJ is the most aggressive central bank in the world today. A weaker yen is one of their goals, a positive for equities.”

“On a fundamental level, a falling yen benefits the export-oriented automobile manufacturers, capital goods manufacturers, and consumer electronics firms -- companies that are well-represented in this fund,” writes Morningstar analyst Patricia Oey in an overview of DXJ. “DXJ’s index excludes companies that derive 80 percent or more of their revenue from Japan, which tilts the index towards companies with a more significant global revenue base.”

“The yen’s recent decline has given a real boost to the Japanese stock market but those invested in an unhedged Japanese equity fund didn’t participate as much as those in DBJP,” said Martin Kremenstein, Deutsche Asset & Wealth Management Americas Head of Passive Asset Management. “We think the entire Japanese stock market will benefit from a weaker yen, not just exporters.”

As the government and the BOJ focuses on loose policies to stimulate the economy, small-cap companies that focus on domestic growth can also begin outperforming. WisdomTree recently launched the WisdomTree Japan Hedged SmallCap Equity Fund (DXJS) to help investors make a yen-hedged equity play on Japanese small-caps. Schwartz also notes that DXJ is better for exposure to Japan’s large exporters and investors can now play small-caps that are local to Japan with DXJS.

Developed Markets
Advisors can also gain hedged-equity exposure to the Eurozone and other developed markets with db X-trackers MSCI EAFE Hedged Equity Fund (DBEF), WisdomTree Europe Hedged Equity Fund (HEDJ), db X-trackers MSCI Germany Hedged Equity Fund (DBGR) and WisdomTree United Kingdom Hedged Equity Fund (DXPS).

The db X-trackers MSCI EAFE Hedged Equity Fund tracks securities from the developed markets of Europe, Asia and the Far East, including Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. Additionally, the fund will mitigate exposure to fluctuations between the U.S. dollar and the respective foreign currencies. The WisdomTree Europe Hedged Equity Fund, on the other hand, provides a more focused play on the Eurozone region. HEDJ includes securities from Germany, France, Netherlands, Spain, Belgium, Italy, Finland, Ireland, Portugal and Austria.

These types of broad currency-hedged equity plays will help investors cover developed markets once the U.S. dollar begins to strengthen. On the other hand, the European Central Bank’s executive board member Peter Praet recently announced that interest rates could be lowered further as clarified by their previous forward guidance, which would weaken the euro against the USD.

Changes in the United Kingdom are also showing similar overlaps to Japan, Schwartz added, pointing to a new head of Bank of England. The BOE provided an unexpected forward guidance and will keep interest rates low for an extended period. The potentially looser monetary policy would help boost the U.K. markets, along with the newly launched DXPS ETF, while weakening the pound sterling.

“In contrast, the Fed may be raising rates sooner,” Schwartz said. “If the U.S. takes its foot off the gas pedal before the ECB and Bank of England, we could see more pressure on Bank of England, and they issued a statement saying to keep rates low for extended period, which is a catalyst for keeping the currency weak.”

Emerging Markets
Additionally, advisors can gain exposure to currency-hedged emerging markets through the db X-trackers MSCI Emerging Markets Hedged Equity Fund (DBEM) and db X-trackers MSCI Brazil Hedged Equity Fund (DBBR). While many have revealed weaknesses in the short-term, the emerging markets are still pumping out greater growth than the developed world.

DBEM tracks securities from a diversified basket from Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, South Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.

Recently, China Premier Li Keqiang promised that Chinese economic growth will maintain a “bottom line” of 7 percent -- the economy expanded 7.5 percent year-over-year in the April to June period.

Brazil was one of the first emerging markets to slow down, and the Brazilian population has started mass protests to evince their distress with the way the government has handled the economy. Nevertheless, Brazil has repealed its Financial Transaction Tax on foreign investments and the central bank is taking an aggressive stance against inflation.