The global equity marketplace is more accessible now than it ever was but with increasingly volatile floating currencies, investing in overseas equities requires you to consider the effects of the currency as an integral part of the trade.
For example, purchasing many of the more popular European ETFs, like the iShares MSCI Germany EWG, -0.28% will result in subpar returns as compared to the German market itself if the euro is losing value, as is the case now. There is a direct correlation between euro depreciation and the performance of ETFs that are proxies of overseas markets. Let's take a closer look.
Here's a daily chart of the the German DAX to start the week. Note how it has surpassed the earlier swing-point high, breaking out to new highs.
Now compare the iShares MSCI Germany which is negatively affected by the falling euro. It has yet to even get back to the prior highs.
Take the currency out of the equation with the WisdomTree Europe Hedged Equity ETF HEDJ, -0.89% and you essentially mirror the gains of the German DAX.
Currency fluctuations do matter, to individuals as much as to large institutional traders. In fact, currency fluctuations are many times the source of volatility in the equity markets, especially on fast directional price adjustments. That was a large part of what happened in September of this year and likely will play a part in upcoming volatility once we get into 2015.
Current equity-market conditions
Since the washout lows, bulls have had the upper hand and they still have the green light into the end of the year. There just isn't anything in the cards to argue strongly against that thesis.
When you look through rose-colored glasses, everything looks rosy, and right now all news is good news. It is likely to stay that way into the New Year.
Disclosure: Little is long HEDJ and EWG.
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