Understanding Currency Hedged ETFs

Introduction

When you invest in international stocks, your returns depend not only on how those companies perform but also on changes in exchange rates. Currency-hedged ETFs are designed to reduce that second risk.

How Currency Affects Returns

If you own European stocks and the euro weakens against the U.S. dollar, your investment is worth fewer dollars, even if the stocks themselves did well. If the euro strengthens, your returns get a boost. Currency movements can add or subtract significantly from returns.

What Hedging Does

Currency-hedged ETFs use financial contracts to offset changes in exchange rates. This means your returns more closely match the performance of the foreign stocks themselves, without the ups and downs of currency movements.

Pros and Cons

Hedging can reduce volatility and protect against a falling foreign currency. However, it adds costs and can reduce returns when foreign currencies rise. Over long periods, many investors choose unhedged international funds because currency movements tend to even out.

Conclusion

Currency-hedged ETFs give investors another tool for managing global investments. Understanding them helps you decide how much currency risk you are comfortable with!