For owners of foreign stock investments, a decline in the value of the dollar against other currencies is a positive factor for their investments. If you think the U.S. dollar will weaken, holding foreign stock exchange-traded funds in your investment account may provide positive returns. The important factor is how the ETF owns the foreign stock shares.
Currency Effects on Share Values
Shares of foreign stocks are denominated in the home currency on the stock exchanges where the shares trade. When the share value converts to dollars, a weaker dollar means the foreign currency buys more dollars and the shares are worth more denominated in dollars. The same effect happens to the value of a foreign stock ETF holding shares of foreign companies. A weak dollar also increases the dollar value of dividends earned in foreign currencies and converted to dollars before being paid out to EFT shareholders.
Weak Dollar Effect on Returns
Data published by Charles Shwab for the 10-year period from 2000 to 2009 shows that in the years when the dollar was down, the effect boosted returns on foreign stocks by 7 percent to 18 percent over the course of a year. This extra return is on top of what the foreign stocks earned if they went up in local currency terms and negated the effect of declining share prices in the home currency. Out of the 10-year period, the dollar was down six of the years.
Avoid International ETFs That Hedge
One point to watch for with international stock ETFs is whether a particular fund attempts to hedge currency fluctuations. Hedging is good for U.S. investors if the dollar is rising, but letting the currency effects flow through to dollars is the desired outcome if the dollar is weak. International stock ETFs that hedge the foreign currencies are easy to spot since they include the words "hedged" or "currency hedged" in the name of the fund. Make a note of these funds for periods when you expect the dollar to strengthen.
International Stock ETF Considerations
To determine the effects of a weak dollar on a specific international ETF, you should check the holdings of the ETF to determine the home currencies of the stocks in the fund. If you think the dollar will be weak against the euro, you can invest in an ETF focused on European stocks. A weak dollar in general allows you to select an ETF holding stocks from all over the world. The international ETFs should also make sense in regards to your investment goals even without the added boost from a weak dollar.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.