Hedged vs Unhedged ETFs: When Currency Protection Matters
Detailed comparison of hedged and unhedged ETFs. Historical performance, cost analysis, and practical guidance for European investors.
7 min czytaniaHedged vs Unhedged ETFs: When Currency Protection Matters
Currency hedging in ETFs removes the impact of exchange rate movements on your investment returns. An unhedged USD ETF gains when USD strengthens against your base currency and loses when USD weakens. A EUR-hedged version eliminates this effect, delivering only the underlying asset's return.
The core decision framework
Hedge bonds, do not hedge stocks
This is the consensus among most portfolio managers, and the reasoning is straightforward:
Bond returns are small (2-5% per year). Currency movements of 5-15% per year can overwhelm bond returns. An unhedged global bond ETF has currency-driven volatility that defeats the purpose of holding bonds (stability). Hedge your bonds.
Stock returns are larger (8-10% per year). Currency movements, while meaningful, are smaller relative to equity returns. Over 20+ years, currency effects tend to wash out. The 1-2% annual hedging cost compounds to significant return drag. Do not hedge long-term equities.
Performance comparison (S&P 500 from EUR investor perspective)
| Period | CSPX (unhedged) | IUSE (EUR hedged) | EUR/USD move |
|---|---|---|---|
| 2022 | -6% in EUR | -19% in EUR | USD +7% (helped unhedged) |
| 2023 | +18% | +24% | USD -3% (helped hedged) |
| 2024 | +28% | +23% | USD +5% (helped unhedged) |
In 2022, the strong USD added returns for unhedged investors. In 2023, EUR strength helped hedged investors. The direction of the benefit is unpredictable, which is precisely the point.
Hedging cost breakdown
| Currency pair | Rate differential | Approximate annual cost |
|---|---|---|
| USD to EUR | ~1.5% | ~1.5% |
| GBP to EUR | ~0.5% | ~0.5% |
| JPY to EUR | ~3.5% | ~3.5% |
| USD to PLN | ~1.25% | ~1.25% |
The cost is highest for currencies with large interest rate differentials. JPY hedging to EUR costs approximately 3.5% per year, making hedged Japanese equity ETFs expensive.
For Polish investors specifically
PLN adds another layer. Most "hedged" ETFs hedge to EUR, not to PLN. A Polish investor in an EUR-hedged S&P 500 ETF still has PLN/EUR exposure.
Full hedging stack: PLN to EUR (you hedge externally or accept this risk) + EUR to USD (the ETF hedges this). The PLN/EUR component is typically left unhedged because:
- PLN-hedged UCITS ETFs barely exist
- The cost would be high (PLN rates are higher than EUR)
- EUR exposure provides useful diversification for a PLN-based investor
Practical recommendation for Polish investors:
- Equities (long-term): Unhedged (VWCE, IWDA, CSPX)
- Bonds: EUR-hedged (AGGH). Accept PLN/EUR exposure as a diversifier
- Short-term savings in PLN: Keep in PLN savings accounts or Polish Treasury bonds
The evidence over long periods
Research by Vanguard and others shows that over 20+ year periods, hedging equity positions provides no statistically significant improvement in risk-adjusted returns. The hedging cost consistently drags returns, while currency movements mean-revert. For bonds, hedging consistently improves risk-adjusted returns.
Track your hedged and unhedged positions in Freenance. Understanding your total currency exposure across all investments helps you make informed decisions about where hedging adds value.
Related Articles
- Currency Hedged ETFs — General hedging guide
- AGGH Review — The standard hedged bond ETF
- Asset Allocation by Age — Portfolio construction context
Want full control over your finances?
Try Freenance for free