Currency-hedged ETFs

Same stocks, without the exchange-rate ride — when hedging helps and what it costs.

When you buy Japanese stocks through an unhedged ETF, you own two exposures: the stocks and the yen. If the market rises 10% but the yen falls 10% against the dollar, your dollar return is roughly zero. A currency-hedged ETF uses forward contracts to neutralize the currency leg, delivering approximately the local-market return.

Hedging costs roughly the interest-rate differential between the two currencies plus trading costs — cheap between similar-rate economies, expensive when rate gaps are wide. Over long horizons currency effects partially wash out, which is why many long-term investors accept unhedged exposure; over shorter horizons the currency can dominate the outcome.

Hedged and unhedged versions of the same index are ideal comparison pairs — this site's currency-hedged directory and the compare tool make the difference visible.