Hedged vs Unhedged ETFs: Which Should Australians Choose?
Hedged or unhedged ETF? Learn how currency movements affect your global share returns in Australia and how to decide what suits your goals.
By Timothy Hirou GaschereauPublished 10 min read
Here is something that surprises a lot of new investors. You buy a global share ETF, the overseas market goes up 10%, and yet your return in Australian dollars is not quite 10%. Sometimes it is more; sometimes it is less. What is going on? The answer is currency, and it is the heart of the hedged vs unhedged ETF debate.
When you invest in overseas assets from Australia, two things happen at once: the underlying shares move, and the Australian dollar moves against the currencies those shares are priced in. Both affect what you end up with. This is general information, not personal advice, but once you see it clearly it is genuinely simple.
🎯 The essential: A global ETF's return in AUD depends on the underlying market AND the Australian dollar. An UNHEDGED ETF rides the currency: a falling AUD boosts your return, a rising AUD trims it. A HEDGED ETF uses forward contracts to strip out most of that currency effect, so you track the overseas market more closely, for a slightly higher fee. Most long-term Australian investors go unhedged, but there is no single right answer. Hedging is irrelevant for Australian-share ETFs.
What is currency risk (and why it matters)?
When you buy a global ETF, say one holding US or international shares, the underlying assets are priced in foreign currencies, but your units are priced in Australian dollars. Every time the AUD moves against those currencies, the value of your investment in AUD terms shifts too, even if the shares have not moved. This is currency risk (foreign exchange exposure). It is not a sign something went wrong, just a feature of investing across borders.
One important note: if you hold an Australian-share ETF (for example, one tracking the ASX 200), currency risk simply does not apply, because those assets are already priced in AUD. The hedged vs unhedged question only matters for overseas assets.
What is an unhedged ETF?
An unhedged ETF is the simpler of the two. You buy units, the fund holds overseas assets, and the AUD exchange rate does whatever it does. You get the full ride, currency movements and all. Think of it like owning a US holiday home: its value in US dollars might not change, but the AUD equivalent can look very different year to year.
- AUD falls against the foreign currency: your overseas holdings are worth MORE in AUD. Currency is a tailwind, boosting returns on top of the market move.
- AUD rises against the foreign currency: your holdings are worth LESS in AUD. Currency is a headwind, trimming returns even if the market did well.
Many of the most popular global ETFs for Australians come unhedged by default. The AUD is historically volatile and notoriously hard to predict, which is exactly why this choice matters. If you are new to ETFs, our what is an ETF guide is a good starting point.
What is a hedged ETF?
A currency hedged ETF tries to remove the exchange-rate wobble. The manager uses financial instruments called forward contracts to lock in exchange rates in advance, neutralising most of the currency movement. Your return then tracks the underlying overseas market much more closely in AUD terms, regardless of what the AUD does. Think of it like booking your holiday exchange rate in advance: the uncertainty is gone, but you pay a small fee for that certainty. Key points:
- It removes most currency risk, but not all (hedging is not perfect).
- It does not remove market risk: if the shares fall, the hedged ETF falls too.
- It generally costs a little more to run than the unhedged version.
A simple worked example
These numbers are illustrative only, not any real fund or period. They just show the concept.
| Scenario | Unhedged (AUD terms) | Hedged (AUD terms) |
|---|---|---|
| AUD rises 5% | ~5% (currency headwind) | ~10% (minus hedging costs) |
| AUD falls 5% | ~15% (currency tailwind) | ~10% (minus hedging costs) |
The point is not to guess which happens next. Nobody reliably knows. The AUD is driven by commodity prices, interest-rate differentials, global risk appetite and a dozen other factors that professional economists get wrong regularly. That unpredictability is the whole reason the choice is worth thinking about, not a prediction to make.
The costs and quirks of hedging
- Higher fees. A hedged ETF typically has a slightly higher management expense ratio (MER), because the manager constantly rolls forward contracts. Small, but it compounds. Check the PDS for the exact figure.
- Not perfect. “Basis risk” and roll costs mean the hedge does not track exactly. It gets you close to the underlying market in AUD, not spot-on.
- Tax and distribution quirks. In some years, hedging mechanics can create higher taxable distributions even if you have not sold anything. Our guide on how dividends are taxed covers ETF distributions and franking credits.
So which should you choose?
Everyone wants a clean answer, and the honest one is: it depends. Here is how most Australians think about it.
The case for unhedged (the more common long-term choice): over very long periods, currency effects tend to wash out (though this is not guaranteed, and short-term swings can be large). Holding foreign currency also adds diversification: when Australia hits a downturn the AUD often falls, which lifts your unhedged overseas holdings in AUD terms, a natural cushion. Unhedged is also simpler and cheaper, which matters over decades.
The case for hedged: you want returns to reflect the actual market without currency noise, you have a shorter time horizon, you believe the AUD is likely to strengthen (which would hurt unhedged), or you simply find currency-driven volatility stressful.
The 50/50 approach: some investors split their global allocation between hedged and unhedged, a pragmatic middle ground. There is no universally right answer. You are not being asked to forecast the AUD, just to decide how much currency exposure you are comfortable holding. Whatever you pick, understand what you own and why.
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❓ Frequently asked questions
What is the difference between a hedged and unhedged ETF?
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An unhedged ETF leaves you fully exposed to movements in the AUD exchange rate. If the AUD falls, your overseas holdings are worth more in AUD terms; if the AUD rises, they are worth less. A hedged ETF uses financial instruments (forward contracts) to neutralise most of that currency movement, so your return in AUD terms tracks the underlying overseas market more closely, regardless of what the AUD does.
Is a hedged ETF better than an unhedged ETF?
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Neither is universally better. A hedged ETF outperforms its unhedged equivalent when the AUD rises, because the currency headwind is removed. An unhedged ETF outperforms when the AUD falls, because the currency tailwind is captured. Since the AUD is historically volatile and unpredictable, there is no reliable way to know in advance which will perform better. The right choice depends on your goals, time horizon, and tolerance for currency-driven volatility.
Do hedged ETFs cost more?
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Yes, generally. Currency hedged ETFs typically carry a slightly higher management expense ratio (MER) than their unhedged equivalents, because the fund manager incurs costs from running and rolling forward contracts. The difference varies between funds, so always check the Product Disclosure Statement (PDS) or fund factsheet for the exact fees before investing.
Does currency hedging matter for Australian share ETFs (like ASX 200 funds)?
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No. If you hold an ETF that invests in Australian shares, all the underlying assets are priced in Australian dollars. There is no foreign currency involved, so currency risk does not apply and hedging is irrelevant for that part of your portfolio. The hedged vs unhedged question only matters when you are investing in overseas assets.
What happens to my unhedged ETF when the Australian dollar falls?
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When the AUD falls against the currencies your ETF holds (for example, the US dollar), your overseas assets convert back into more Australian dollars. This means your unhedged ETF is worth more in AUD terms, even if the underlying shares have not moved. A falling AUD acts as a tailwind for unhedged international ETF investors.
Can I hold both hedged and unhedged ETFs?
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Yes, absolutely. Some investors split their global share allocation between hedged and unhedged ETFs. This approach reduces some of the currency volatility while keeping costs lower than going fully hedged. It is a pragmatic middle ground, though it does add a little complexity to your portfolio. As always, consider your own goals and circumstances, and speak to a licensed financial adviser if you are unsure.
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This article is general information only, not financial advice. It does not consider your objectives or circumstances. Always read the relevant Product Disclosure Statement and consider a licensed financial adviser before investing.
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General information only. This article is educational and does not constitute personal financial advice. It does not account for your circumstances. Consider your own situation and seek advice from a licensed adviser before acting. Read our full disclaimer.
Timothy Hirou Gaschereau
Founder of Snowball Invest, not a financial adviser.
I write about what I'm learning myself, because nobody ever taught us how to take control of our own money. It's a skill, not a mystery, and it's never too late to learn it. The best day to start was yesterday, the second best is today.
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