Currency-hedged ETFs: when should European investors hedge US dollar exposure?

A currency-hedged ETF holds exactly the same stocks as its unhedged sibling, then adds a layer of one-month forward contracts that offset moves in the fund's foreign currencies against the euro. If the dollar falls 5% against the euro over the month, the forwards gain roughly what the currency translation lost, and vice versa. The result is a return close to the index's local-currency performance — what a US investor would experience — rather than the euro-translated one.

The hedge is reset monthly, not continuously, so it is never perfect: intramonth swings, cash flows and dividends leave a small residual mismatch. And it is not free. The mechanical cost of hedging is driven by the interest-rate differential between the two currencies — when US rates sit above euro rates, hedging dollars into euros costs roughly that gap per year, on top of a TER that is typically 0.05% to 0.10% higher than the unhedged class. In recent rate environments, the all-in drag of hedging a US-heavy equity fund has often run between 1% and 2% annually — far more than the TER investors agonise over.

Over multi-decade horizons, exchange rates between major developed currencies have tended to wash out relative to the compounding of the equities themselves — EUR/USD has spent most of the past 25 years oscillating in a band, while global stocks multiplied several times over. Paying a persistent 1%+ annual cost to remove a risk that historically mean-reverts is a poor trade for a 20-year savings plan; the hedging drag compounds exactly like a very high TER.

There is also a subtler point: currency exposure in a global fund is itself a form of diversification. A euro-zone investor whose salary, mortgage and pension are all in euros already has enormous concentrated euro exposure. Holding part of your wealth in dollar, yen and pound assets means a euro-specific crisis does not hit every line of your net worth at once. Hedging everything back into euros removes that shock absorber precisely when you might want it most.

Bonds are the big exception. A global government or aggregate bond ETF held for stability might yield 3% with single-digit volatility — but unhedged currency moves of 10% in a year would swamp the asset's entire purpose. This is why virtually all sensible global bond UCITS ETFs are sold EUR-hedged by default, and why the hedged class is the right choice there: for bonds, currency risk is not diversification, it is contamination of the one asset meant to be quiet.

Equity hedging can also make sense for shorter horizons. If you are five years from drawing on the money, a large adverse currency move has real consequences and little time to mean-revert; a hedged class converts an unknowable currency outcome into a known, budgetable cost. Investors with large single-country exposure — a dedicated Japan or US fund rather than a global one — sometimes hedge for the same reason: the concentrated currency bet is bigger relative to the equity bet.

How to tell the classes apart: the fund name carries "EUR Hedged" (or "H" / "EUR-H"), the ISIN differs from the unhedged class, and the factsheet states the hedging policy and reset frequency. As with accumulating versus distributing classes, they are separate funds — check you are buying the one you mean to, because the long-term return paths diverge substantially. Our screener shows each share class separately, so comparing a fund against its hedged sibling takes seconds.