On $NIKKEI and yen hedging – am I overcomplicating this?
Alright, so I've been watching the $NIKKEI's performance lately and it's been a beast, no doubt. My broker offers a hedged version of the index ETF, which on paper seems like a no-brainer to strip out the yen volatility. I get the basic mechanics – it aims to remove the currency fluctuations from your return.
But here's where my brain starts to tie itself in knots: if I believe the yen is going to continue weakening against the dollar (and let's be honest, that's been the prevailing wind for a while), then wouldn't a non-hedged position actually benefit from that currency play, effectively adding to the $NIKKEI's price appreciation when converted back to USD? It feels like hedging assumes currency neutrality, or even a strengthening yen, which might not be the case. Am I missing something fundamental here, or is the hedged option mainly for those who want pure equity exposure regardless of FX calls?
It's a valid concern. If you have a strong directional view on the yen, hedging the ETF could potentially limit your upside if the yen weakens significantly, which would otherwise boost your unhedged Nikkei returns for a USD investor. It really comes down to your conviction on the currency.