The Key to International ETF Investing: FXY, EWZ, EWJ ,DXJ, BZF

Investors have largely embraced international ETFs to start 2013. Funds tracking emerging markets have seen particularly huge inflows and are easily setting the pace for ETFs this year.

Yet while many investors may be jumping into these products, some might not understand one of the biggest—and arguably most important—aspects of these types of funds, currency exposure. While this seemingly insignificant issue may be an afterthought for most, it can actually be a huge driver, or even the main determinant, of performance in a given time period.

That is because for American investors in foreign securities, returns consist of two components; the performance of the underlying stocks +/- the foreign currency impact.

Depending on how the dollar has traded, this forex aspect can result in a big difference when returns are repatriated back to dollars. If the dollar has strengthened against international currencies, total returns will be lower, while the opposite will be the case when the U.S. currency is facing global weakness (read Currency Hedged ETFs: Top International Picks?).

This is especially true when investors look at countries which have seen huge currency swings (relative to the dollar) in recent trading. Two important markets where this has been true over the past year are Brazil and Japan. (more)

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