How ETF Currency Hedging Works

Without hedging, an investor’s return is simply the foreign portfolio return plus the foreign currency return. A currency hedge takes the foreign currency return out of the equation

Caroline Gutman 18 September, 2014 | 12:47PM
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Picking the right ETF in today’s landscape is hard enough. Between selecting an index, a fund provider and a replication method, there are many choices to make. But an additional decision investors may want to consider when buying an ETF exposed to foreign assets is whether to protect their investment against currency fluctuations. The easiest way to do this with ETFs is by buying an ETF with a built-in currency hedge.

Without hedging, an investor’s return is simply the foreign portfolio return plus the foreign currency return. A currency hedge aims to take the foreign currency return out of the equation.

Currency hedging as a tool is nothing new. Investors have long protected against currency fluctuations by buying derivatives or short positions to protect their portfolios. But built-in currency hedges can simplify the process, and European ETF providers have recognised the appeal. Forty five currency-hedged equity ETFs have launched in Europe in the last 12 months, bringing the total number available to more than 70.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
iShares MSCI Japan ETF USD Acc GBP13,725.18 GBP-0.22Rating
iShares MSCI Japan EUR Hedged ETF Acc59.53 EUR0.40

About Author

Caroline Gutman  is a passive fund analyst for Morningstar