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Fund Spy

A Tough Time for All International-Stock Funds in 2018

Plunging foreign markets and unfavorable currency trends weigh heavily on results.

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It was a tough 2018 for equity fund investors with money in the U.S. market: The S&P 500 lost 6%, and the Nasdaq fell 4%. But results were worse for those invested in markets outside the United States. The MSCI EAFE Index of developed markets plunged about 14% in U.S.-dollar terms, as did the MSCI ACWI ex USA Index (which includes a hefty dose of emerging markets). A variety of concerns hurt international markets, from local political issues to dismal economic data to the global impact of U.S. policies. Many stock markets abroad posted deeper losses than those in the U.S.

However, that wasn't the only problem for U.S.-based investors in international funds. In 2018, currency exposure also played a role. With the exception of the yen and Swiss franc, most foreign currencies lost a good amount of value against the U.S. dollar for the year. As a result, U.S.-based international funds suffered from currency losses on top of stock market declines. To illustrate, the currency effect took about 3 percentage points off the MSCI EAFE Index's return; that commonly used benchmark dropped 11% in local-currency terms but 14% when converted to U.S.-dollar terms. (Only a few equity funds avoided this effect by hedging all of their currency exposure into the U.S. dollar, though many partially hedge.)

Gregg Wolper has a position in the following securities mentioned above: SGOVX. Find out about Morningstar’s editorial policies.