Currency Impact

Investors often worry whether the value of their investments will fall but rarely consider the impact of a rise or fall in exchange rates. International investing in assets denominated in a currency other than their local one is exposed to fluctuations in exchange rates, or “currency risk”.

Currency risk is often overlooked but can have a significant impact on returns and should be a central consideration when investing in any foreign asset. Unless intended, leaving currency risk unmanaged causes investments to be subject to movements and volatility in the underlying relevant exchange rate. Currency fluctuations can assist or negate the gains from an underlying asset for a foreign investment.

Even investments available in an investor’s home market can be subject to currency fluctuations if those assets are denominated in a foreign currency (e.g., commodities are typically priced in U.S. Dollars). A currency hedge can be used to mitigate the impact of currency fluctuations on foreign asset returns. Historically, such strategies required significant expertise and infrastructure to execute meaning they could only be implemented by institutional investors. However, a currency hedged ETP not only provides exposure to the underlying asset but also includes an inbuilt currency hedge. This allows investors to focus on assessing the underlying asset based on its fundamentals without having to worry about the currency risk.

Currency hedges are rebalanced periodically, typically on a daily or monthly basis. The more frequent the rebalancing, the more closely the ETP correlates with the price movement of the underlying benchmark.

Leverage Shares ETPs are not currency hedged and hence, investors are exposed to currency risk when buying an ETP that trades in a currency different from that of the underlying instrument.