Risk-on/Risk-off investing - using currency to de-risk global exposure | BetaShares

Risk-on/Risk-off investing – using currency to de-risk global exposure

BY David Bassanese | 28 October 2014

With the Australian dollar seemingly on a downward trend, investor interest in gaining offshore investment exposure is growing. In our recent Portfolio Construction post, we looked at some strategies to implement ‘risk-on/risk-off’ for domestic equities exposures. In this post, we look at how currency can be used to de-risk your international share allocations.


We hear from clients that investments in international equities are currently being made both due to a positive view on the underlying foreign sharemarket and due to the prevailing view that the foreign currency may appreciate against the Australian dollar. After all, by investing in the United States equity market on an unhedged basis, the A$ value of this investment can be expected to increase – even if equity prices remain flat – should the A$ continue to fall against the US dollar.

The same holds true should one invest in other offshore markets, such as in Europe or Japan.  To the extent the Euro or the Yen appreciate against the A$, Australian investors in these markets should benefit from a foreign exchange rate gain when they eventually sell these foreign assets and convert funds back into Australian dollars.

With the growing range of ETFs in the market place, it has never been easier for investors to gain unhedged international equity exposure.

Of course, investing in international equity markets can be just as risky as investing in Australian equities.  Equity prices are volatile, and often experience large swings over the economic cycle.

In this regard, currency exposure may be seen as a useful complement to international investment strategies as it offers investors an opportunity to retain a desired foreign exchange exposure even if they wish to tactically reduce equity exposure – and move to cash – from time to time. Due to the ability of investors to now access currency exposures via ETFs, implementing such a strategy is straightforward.

For example, should an investor be exposed to the US equity market through an ASX traded international equity ETF, for example, there may come a time when they anticipate a large market downturn and wish to switch to cash while still retaining US dollar currency exposure.  In this case, the investor could simply sell down their US equity ETF and buy the BetaShares US Dollar ETF (ASX Code: USD) instead.

Similar strategies are available to investors in European and British Pound exposures with the BetaShares Euro Dollar ETF (ASX Code EEU) and British Pound (ASX Code POU) respectively.

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