As the Trump administration doubles down on policies aimed at strengthening the U.S. dollar and levelling global trade imbalances, in particular US investors are finding themselves at the crossroads of opportunity and risk. While these measures might bolster domestic markets, they also expose international equity investments to heightened currency volatility.
To learn more, Digital Journal spoke with Stuart Thomas of Precidian Investment. Thomas offers insights into how investors can navigate these challenges, particularly with the advent of ADR-hedged ETFs, which aim to mitigate foreign exchange risks and optimize returns.
Thomas is a veteran financial executive with over 35 years of industry experience. He is a Founding Principal of Precidian Investments, and has an extensive background in domestic and international equities, as well as product development, structuring, and sales.
Digital Journal: How Investors Can Navigate Global Markets Without Currency Surprises
Stuart Thomas: As the Trump administration doubles down on policies aimed at strengthening the U.S. dollar and leveling global trade imbalances, U.S. investors are finding themselves at the crossroads of opportunity and risk. While these pro-business measures bolster domestic markets and the U.S. dollar, they expose international equity investment returns to heightened currency volatility.
While investing in global markets offers exciting opportunities and necessary diversification, many investors overlook a key risk: the impact of foreign currency exposure. When U.S. investors buy shares of foreign companies, even through U.S.-listed American Depositary Receipts (ADRs), their returns can be affected by shifts in exchange rates since they are being forced to take exposure to the underlying currency. A strong U.S. dollar, for example, can reduce the returns of international investments, while a weaker dollar can boost returns.
To help investors navigate this challenge, ADR-hedged ETFs (Exchange-Traded Funds) have emerged as a tool to mitigate currency risk. Digital Journal spoke with Stuart Thomas, Founding Principal of Precidian Investments who explained why currency exposure matters and how ADR-hedged ETFs can provide a more stable approach to global investing.
DJ: Why do many investors overlook currency risks?
Thomas: Many U.S. investors wrongly assume that when they buy international stocks listed on U.S. exchanges, they are shielded from currency risk. In reality, if an investor buys a European stock using ADRs, ETFs, or foreign ordinary share priced in U.S. dollars, their investment’s returns are tied to the local currency—in this case, the euro. If the euro weakens against the dollar, the investment will lag the returns of the local shares regardless of underlying company performance.
Historically, some investors have ignored these risks, assuming currency fluctuations balance out over time. However, given the volatility of exchange rates, the prolonged period of U.S. dollar outperformance, new pro-U.S. dollar policies, and unexpected economic events, this assumption has been and could continue to be risky.
DJ: What is the impact of a strong U.S. dollar on global investments?
Thomas: When the U.S. dollar strengthens, international investments often suffer. Foreign companies report their earnings in local currency, meaning that when those earnings are converted to U.S. dollars, they lose value relative to the underlying currency.
For example, in admittingly simplistic terms, if a European company posts a 10% gain in its stock price but the euro weakens against the U.S. dollar by 5%, a U.S. investor will likely only see a 5% return when converting back to dollars. This currency effect can eat into profits or even turn gains into losses.
DJ: What are the risks of holding international equities and ADRs?
Thomas: Beyond traditional risks like company performance and market trends, currency volatility can have a major impact on returns. The fluctuations between the local currency and the U.S. dollar can create unpredictable gains or losses. This is especially true for long-term investors, who may not realize the extent to which currency movements shape their investment outcomes.
DJ: How can ADR-Hedged ETFs help investors’ performance?
Thomas: ADR-hedged ETFs are designed to mitigate the volatility between the local currency and the U.S. dollar thereby providing returns more in line with those of the underlying local shares. These ETFs contain traditional ADRs and a currency hedge to mitigate the impact of exchange rate fluctuations. Essentially, they allow investors to benefit from foreign companies’ performance without being unduly exposed to currency swings.
Think of it like adding a safety net to your international investments—these ETFs help smooth out the ride, letting you focus on company performance rather than worrying about exchange rates.
DJ: What is the growing demand for hedged investment products
Thomas: As the U.S. dollar continues to show strength, more investors are recognizing the potential impact of currency exposure. ADR-hedged ETFs have gained traction as a simple and cost-effective way to manage this risk. With more awareness, investors are likely to pay closer attention to how currency movements affect their portfolios.
For investors looking to expand their portfolios globally, understanding currency risks is just as important as picking the right stocks. ADR-hedged ETFs provide a practical solution, offering international exposure while mitigating currency swings. As global investing becomes more accessible, tools like these will play a vital role in helping investors make informed and confident decisions.
