Currency risk in ETFs (and what “hedged” means)
Two people buy the same world ETF on the same day and end up with slightly different returns. Often the difference is currency.
Three currencies, not one
It is easy to mix up three different things. There is the currency you trade the ETF in at your broker; the The currency the fund reports in. You can often buy it in another currency; that does not change what it holds. More → ; and the currencies of the companies it actually holds underneath. The last one is what really matters: a world ETF owns businesses priced in dollars, euros, yen, pounds and more, whatever currency you happen to trade the fund in.
How currency moves your return
Say a US company in your fund is flat in dollars over a year, but the dollar strengthens against your home currency. Converted back, your holding is worth a little more — currency helped. If the dollar weakens, currency hurts. Over short periods this can be a real chunk of the return; over long periods it tends to wash out more, though never perfectly. It is a normal part of investing across borders, not a fee.
What “hedged” does
Some funds offer a currency-hedged share class. It uses contracts to cancel out most of the exchange-rate movement, so your return tracks the holdings in your home currency more closely. That smoothing is not free: hedging carries a small ongoing cost in the fund’s running expenses, and it removes the currency tailwind as well as the headwind. Whether that trade-off fits you depends on your time frame and what you are trying to do.