Americans chase European stocks but avoid the euro. The right call?

Like unworldly tourists who eat at McDonald’s on their European vacation, American investors are feasting on overseas stocks but don’t want to taste foreign currencies in the process.

While the stateside benchmark Standard & Poor’s 500 index led all major markets in 2014 and has recovered from its January dip to record a new all-time high, U.S. stocks are in fact among the weakest performers in the world so far this year.

The S&P 500 is up 2% to start 2015, while the rest of the world’s equities have appreciated nearly twice as much, led by European markets surging to double-digit gains.

Entering 2015, the consensus was that an accelerating domestic economy in the U.S. made American stocks the place to be. But, of course, a crowded consensus often invites comeuppance, and the outperformance of foreign stocks has drawn heavy investment flows to the rest of the developed world.

Investor optimism for European shares, in particular, quickly surged after the European Central Bank set a new bond-purchase stimulus plan last month. Among exchange-traded funds that track national indexes, funds targeting Germany, such as iShares Germany (EWG), have collected the most new assets by far this year, followed by India and Taiwan, according to Strategas Research Partners.

Hedging foreign currencies

Institutional investors, too, have swiveled quickly toward European stocks in the past month, as Yahoo Finance Contributor Urban Carmel details in this breakdown of the latest Bank of America Merrill Lynch Global Fund Manager Survey.

The money, clearly, is chasing the overseas markets higher. Yet those leading returns are measured in the “local currency” used in each country. The euro and the Japanese yen, most prominently, have of course dropped significantly in value against the dollar in recent months. So when a U.S.-based investor translates market returns back into dollars, they reap lower gains in dollar terms.

[Get the Latest Market Data and News with the Yahoo Finance App]

Wall Street, of course, has a packaged product built for every perceived problem, including unwelcome currency exposure of foreign stocks.

Currency-hedged ETFs, which track global stock indexes while paying to strip away the effect of foreign-exchange movements, are this year’s hot seller. According to Deutsche Bank, this category’s assets under management have vaulted higher by more than 1,500% over the past two years.

A big player in this group, Deutsche X-Trackers MSCI EAFE Hedged Equity (DBEF) has nearly doubled in size in just the first seven weeks of the year, to $4.6 billion. Wisdom Tree Europe Hedged Equity (HEDJ) took in nearly $3 billion in January alone, on top of $2.8 billion in fresh cash in the final months of 2014.

As with all financial fashions, this one is based on a logical premise: The dollar has been in an uptrend as the Federal Reserve seems far closer to raising interest rates in a firmer economy than other central banks are.

Risk of a dollar turnaround

Yet there’s also the standard risk present as any budding investing craze reflects clear hindsight and crowd psychology in heavy measures.

The enthusiasm for non-U.S. investments without exposure to non-dollar currencies can turn out misplaced in a couple of ways. Foreign stocks could cease outperforming the domestic market, or the dollar could confound most expectations and relinquish some of its strength.

James Paulsen, chief investment strategist at Wells Capital Management, has taken a contrarian stance against the dollar for 2015. His rationale:

“Most expect the U.S. dollar to continue rising this year,” he notes. “The Fed will likely begin raising interest rates soon while sluggish growth abroad should keep policy officials there in accommodation mode. However, it is not the different monetary policy actions which matter most for the currency. Rather, it is how those actions are perceived. If the more aggressive policies in the eurozone and Japan work and boost economic growth, it should bring a bid to both the euro and the yen.”

With regard to Europe, the growth data have improved nicely in recent weeks. And indeed, the dollar stopped rising against the euro just two trading days after the European Central Bank announced its money-creation plan on Jan. 22. So the slam-dunk strong-dollar trade has clanged against the back of the rim over the past few weeks.

On a broader level, neutralizing the foreign-currency piece of foreign investment returns with currency-hedged funds in some sense counters the benefits of global diversification.

For a long-term investor, spreading one’s bets across regions and asset classes works a sort of return-enhancing alchemy that can be thwarted by costly market-timing calls on underlying currencies.

When trotting around the globe, in other words, eat local – even if the Big Macs are cheaper than they used to be when paying with stronger dollars.