Writing for The Wall Street Journal’s SmartMoney, Alex Tarquinio discusses the pitfalls of international ETF investing: 

The ETF industry now offers 73 single-country funds, almost double the number from two years ago, with $47 billion under management. But having a thriving economy doesn’t mean that a country’s ETF won’t get crushed. One problem: Very few of these ETFs use hedging strategies to compensate for the movements of local currency. Those fluctuations can clobber a U.S. investor’s returns, especially when a currency drops in value against the dollar. Swiss bank UBS reports that from 2000 to 2010, while Taiwan’s economy had an average annual growth rate of 4.2 percent, its stock market barely budged in U.S. dollar terms, because of currency moves. Angus Shillington, director of international equities at Van Eck Global, a brokerage that offers single-country ETFs, says predicting which countries’ markets will avoid such problems “is more difficult than picking stocks.”

ETF defenders respond that hedging would make their products more expensive. Money managers who use the single-country products say that over the long term, currency fluctuations tend to even out. Charles Sizemore, a Dallas investment adviser, says he’s seen European ETFs benefit recently from the falling euro: “The lack of hedging is not necessarily a bad thing.”

To see the full article on SmartMoney.com, see “Wilting ETF Returns

Over longer time horizons, currency fluctuations tend to have a minimal impact on investment returns.  But in any given year or even decade, currency moves can mean the difference between earning a respectable profit or suffering a loss. 

The impact on investors is more complicated than simply translating the foreign stock price into dollars, however.  Consider the case of European exporters.  A falling euro makes European exports more attractive, which boosts sales.  And when your foreign revenues are coming in a stronger currency than your domestic expenses, that is a recipe for a nice little boost to earnings, all else equal.  This was certainly the case for American multinationals throughout the 2000s.  As the dollar sank against most world currencies from 2000 to 2008, revenues from overseas boosted earnings.  (This has since gone into reverse with the dollar rising as a safe haven currency.)

Currency risk is not something that should necessarily be avoided, but rather something that investors should acknowledge and manage (and at times even embrace).  At current prices, we consider the weakness of the euro to be a positive for the European stocks recommended by the Sizemore Investment Letter.