The S&P 500 edged to a new intra-session high on lucky Friday the 13th. However, it has lagged behind many of the other DM equity markets. When invests in their own currency, total return is straight forward. It is the capital appreciation (or loss) and the income stream (dividend or coupon).  When investing in foreign instruments, there is a third factor and that is the currency.

It is important because if one has a portfolio if global bonds, the variability of the currency could accounts for roughly 2/3 of the total return over time. The currency component on a portfolio of international stocks could account for a 1/3 of the total return over time.   

When one's currency is weak, an investment in foreign markets earns from the appreciation of the local currency. When one's currency is in an appreciating phase, investing overseas poses challenges in managing the currency exposure.  

The Great Graphic below shows several of the major equity markets performance this year indexed so you can see the relative performance on a single scale.  

White          US           1.6%                                       Yellow   Australia              8.6%

Orange        Japan        2.9%                                       Pink        France                11.4%

Green          Canada     4.6%                                       Red        Germany             12.3%

Blue            UK           4.7%

Now consider the currency moves. The Australian dollar is off nearly 5% since the start of the year, more than halving the local return. The 6.7% depreciation of the Canadian dollar more than offset the 4.6% advance of the stock market. The strong performance of German and French equities is dulled by the almost 6% depreciation of the euro. The FTSE's 4.7% gain is slimmed by the 1.1% decline in the pound. Japan's return has been enhanced by a nearly 1% appreciation of the yen.  

I accept the principle of diversification, but because I think the dollar's bull move has several quarters to run, and in terms of magnitude, think the move is 1/3-1/2 complete, I have been drawn to ETFs that hedge the currency risk. There are numerous ETFs that do this and more are being listed. This is not meant as advice for any one,  just sharing how I try to combine by dollar outlook with my own investing.   

Read more by Marc on his site Marc to Market.