NEW YORK (ETF Expert) -- The U.S. economy has been growing at an annualized pace of roughly 2% since the current expansion began in June of 2009. Gross Domestic Product for the first half of 2014 hovered around a paltry 1%.
While many contend that second-quarter growth at approximately 4% is signaling better times ahead, members of the Federal Reserve are keenly aware of the recovery's fragility. That is why the central bank continues to maintain a remarkably accommodating policy of zero percent lending rates.
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Yet, all things in life are relative. Japan's economy in the second quarter? It shriveled up like a dried apricot, contracting at a pace not seen since last decade's global meltdown. What's more, few analysts expect to see any growth in the "land of the rising sun" until 2015. Meanwhile, the most recent data out of Europe exposed region-wide weakness as the economies of Germany and France actually shrank.
The fact that the U.S. stocks continue to outperform most developed world equities is a function of the U.S. economy's modest success -- a function of relativity. Indeed, investors seem content to slip into the least soiled shirt from the dirty hamper. Might there come a time when institutional "movers-n-shakers" will view the premium to own expensive U.S. shares over inexpensive foreign shares as too hefty? Undoubtedly. For the time being, however, exchange-traded fund enthusiasts who wish to remain globally diversified could opt for a currency hedge.
For example, Japan's struggles led the Bank of Japan towards the aggressive creation of electronic money for the purpose of buying assets, depressing interest rates and jolting the Japanese economy back to life. Since speculation about the necessity of the emergency-level measures began around July 1, the Japanese yen has depreciated dramatically against the U.S. dollar.
The currency effect can best be seen by comparing the most popular ETF for investing in Japanese equities, iShares MSCI Japan (EWJ) , against WisdomTree Japan Hedged Equity (DXJ) . EWJ found itself down 1.5% in the period since July began whereas DXJ picked up about 4.5%.
Although the 6% discrepancy in performance between the two Japanese ETFs cannot be explained entirely by depreciation in the Japanese yen, the bulk of it can be. Take a look at CurrencyShares Japanese Trust (FXY) with its -5.2% return in the time period.