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How to overlay currency hedging on global ETFs

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By Nick Nicolaides

2025-08-045 min read

Are you looking to build a more complex framework around your international investing strategy? Here's how you can overlay currency hedging on global ETFs.

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Investing in global ETFs is a popular way for Australians to gain exposure to international markets — from the S&P 500 to Europe, Asia, and beyond. But when you invest globally, you’re not just buying foreign shares. You’re also taking on currency risk. And that’s where currency hedging comes into play.

This article unpacks what currency hedging means, how it works in the context of global ETFs, and what everyday investors might want to consider when weighing up hedged versus unhedged ETF options.

What is currency hedging?

Currency hedging is a strategy used to reduce the impact of exchange rate movements on an investment. When Australian investors buy global ETFs, the underlying assets are typically priced in foreign currencies — like USD, EUR, JPY, or GBP. But the returns are eventually converted back to Australian dollars (AUD), and that conversion can either work in your favour or against you.

Currency risk in global investing

Here’s a simple example: imagine you invest in a US ETF and over the next year, the ETF rises 10%. However, if the Australian dollar strengthens against the US dollar during that same period, some of those gains might be eroded when converted back to AUD. Conversely, if the AUD weakens, your returns might get a boost.

This variability in returns due to currency movements is known as currency risk .

Hedged vs unhedged ETFs

To manage this risk, ETF providers often offer two versions of the same fund:

  • Unhedged : Leaves currency exposure intact. Your returns are affected by both asset performance and currency fluctuations.
  • Hedged : Uses financial instruments to minimise the impact of exchange rate movements. Your returns more closely reflect the performance of the underlying assets alone.

How hedging works in global ETFs

ETF issuers use financial contracts — typically forward exchange contracts — to lock in currency exchange rates over a set period. These contracts aim to “neutralise” the effect of currency moves between the fund’s base currency and the investor’s currency (AUD, in this case).

An overlay, not an add-on

It’s worth clarifying that individual investors don’t personally hedge. Rather, they choose ETFs that already have the hedge built in. So when people talk about “overlaying” a currency hedge on global ETFs, it means opting for a hedged version of an ETF rather than modifying a fund themselves.

For example:

These ETFs track similar underlying indexes but handle currency exposure differently.

Examples of hedged vs unhedged ETFs

To make things more tangible, let’s look at a few real-world ETF pairs that offer both hedged and unhedged options:

ETF

Type

Region

Hedging

VGS

Vanguard International Shares ETF

Developed Markets (ex-AU)

Unhedged

VGAD

Vanguard International Shares (Hedged) ETF

Developed Markets (ex-AU)

Hedged

IVV

iShares S&P 500 ETF

US

Unhedged

IHVV

iShares S&P 500 ETF (Hedged)

US

Hedged

NDQ

Betashares Nasdaq 100 ETF

US (Tech-focused)

Unhedged

HNDQ

Betashares Nasdaq 100 ETF (Hedged)

US (Tech-focused)

Hedged

These pairs provide a way to directly compare how hedging affects returns over time.

Diverging performance

During periods where the AUD is volatile, returns between hedged and unhedged ETFs can differ significantly.

For instance, in 2020 when the AUD fell sharply against the USD during the initial COVID market panic, unhedged global ETFs saw a boost in AUD terms. Investors in unhedged funds benefited not only from the market recovery, but also from favourable currency movements.

However, during 2017–2018, when the AUD strengthened, hedged versions often outperformed because they weren’t dragged down by currency losses.

Pros and cons of currency hedging

Currency hedging is neither inherently good nor bad — it’s a trade-off. Let’s look at some of the key benefits and drawbacks:

Benefits of hedging

  • Reduces currency volatility : Hedging limits the impact of exchange rate swings on investment returns.
  • Aligns with local spending needs : If your future spending will be in AUD (for example, retirement in Australia), hedging can help match investment outcomes to future liabilities.
  • Clearer exposure to underlying assets : Performance is more directly tied to the companies in the index, not currency movements.

Drawbacks of hedging

  • Costs : Hedging involves costs that may slightly reduce long-term returns (though these are generally small for large, passive ETFs).
  • Opportunity Loss : If the AUD weakens, unhedged ETFs may benefit — hedged ETFs won’t.
  • Imperfect Hedging : In fast-moving markets, hedges aren’t always perfect. The fund might not eliminate 100% of currency effects.

How might investors think about hedging?

There’s no one-size-fits-all answer, and this article won’t try to provide one. But here are some neutral factors investors might consider when weighing their options:

Investment horizon

Long-term investors may be more comfortable with currency fluctuations evening out over time. Others might prefer short-term stability and reduced volatility, especially if they're nearing retirement or needing predictable returns.

Where will you spend?

If you plan to retire in Australia and spend in AUD, a hedged ETF might align more closely with your future financial needs. If you’re saving for overseas expenses — such as travel or relocating — an unhedged ETF could make sense.

Views on the AUD

If you believe the Australian dollar is likely to rise in value, hedged ETFs may help preserve returns. If you expect it to fall, unhedged ETFs could provide an uplift — though currency forecasting is notoriously difficult.

Portfolio diversification

Some investors hold a mix of hedged and unhedged ETFs to spread risk. For example, using hedged ETFs for core holdings and unhedged for satellite exposure.

A Quick comparison: VGS vs VGAD

Here’s a simplified illustration of how two similar ETFs can perform differently due to currency effects:

Year

VGS (Unhedged)

VGAD (Hedged)

AUD/USD Change

2020

+5.8%

+1.4%

AUD weakened

2021

+25.2%

+22.5%

AUD strengthened

2022

-12.4%

-18.6%

AUD volatile

Note: Figures are illustrative and rounded. Actual ETF performance may vary.

This table shows that currency movements can amplify or reduce returns depending on market conditions.

Final thoughts

Currency hedging is an important — but often overlooked — dimension of global investing. Whether or not to hedge isn’t a matter of “right” or “wrong,” but of understanding what each approach entails.

As an investor exploring global ETFs, being aware of your exposure to foreign currencies, and how hedging affects performance, is a useful step toward making informed investment choices that align with your own goals.

All figures and data in this article were accurate at the time it was published. That said, financial markets, economic conditions and government policies can change quickly, so it's a good idea to double-check the latest info before making any decisions.

WRITTEN BY
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Nick Nicolaides

Nick Nicolaides is the co-founder and CEO at Pearler.

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