Currency movement has the potential to significantly impact the net returns of an international equity exposure, for better or worse.
Currency strength and weakness can vary over short, mid, and long terms, making it difficult to determine the direction foreign currencies may take.
Near-zero correlation has been observed between foreign currency movement and foreign equity movement, making it difficult to replicate the same view across equities and currencies.1
There are pros and cons for both including and excluding currency exposure.
A neutral level of 50% exposure to currencies can be an efficient way to implement a low-cost, passive exposure to international developed market equities, providing some supplemental performance benefits by incorporating currencies while lowering potential negative impacts.
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