There is no doubt that if you have a global asset allocation your foreign investments are exposed to currency risk. In a low interest rate environment, and particularly considering today's likely "lower for longer" scenario, that risk can be substantial. That's because in such an environment currency movements can have a substantial, if not decisive, impact on overall performance.
Currency movements are often driven by the actions of central banks. Since central bank policies in different regions of the world are diverging more than usual these days, we have been seeing more than usual currency fluctuation. Other factors can play a role as well.
These can result in major shocks, such as the one in January 2015 when the Swiss National Bank removed the Swiss franc peg to the euro. Or the recent Brexit vote, which has led to the current depreciation of the British pound.
But in a world of single-digit returns, it doesn't necessarily take such one-of-a-kind events to cause currencies to move far enough to eat up some or all of an investor's profits.
For this reason, currency hedging is an indispensable tool these days. ETFs can help. With currency-hedged solutions, investors can protect their global investments from today's volatile currency markets, taking this unpredictable factor out of what is a difficult enough investment equation.