Asset Classes and Global Exposure · ETFs

Foreign assets and foreign currencies contribute separately to an international ETF return. A hedged share class changes part of that exposure, not every risk.

Translate returns into your spending currency

An international holding can gain in its local market while losing value after conversion. If local assets rise 8% and their currency falls 10% against your reporting currency, the combined return is 1.08 multiplied by 0.90 minus 1, or a loss of 2.8%. Simply subtracting percentages gives an approximation, not the exact compounded result.

Trading currency does not determine the hedge

A dollar trading line can still hold unhedged foreign equities. The fund's base currency is an accounting convention, and its trading currency concerns the transaction. Read the hedge policy for the specific share class. A product described as hedged may target a named currency and apply scheduled adjustments rather than maintaining a perfect hedge at every moment.

A hedge has its own economics

Currency forwards or similar instruments can reduce selected exchange rate effects, but their pricing reflects interest rate differences and implementation costs. Holdings and prices change between adjustments, leaving residual exposure. Hedging can also create counterparty and operational considerations. It does not protect against falling company profits, bond defaults or broad market losses.

Make the decision at portfolio level

Compare the currencies of your future spending, income and existing investments. A bond allocation intended to dampen volatility raises different questions from a long horizon equity allocation. Avoid choosing whichever class performed better recently, because that may merely reward the last currency move. Document the purpose of the hedge and review it when your obligations change rather than with every exchange rate fluctuation.

Try it yourself

A foreign portfolio is unchanged in local currency, but that currency gains 6% against your reporting currency. What is the approximate unhedged return before costs?

Show the worked answer

It is 6%. A hedged class may produce a different result because the hedge aims to offset the selected currency exposure and has its own costs and pricing effects.

Further reading

Educational material, not a recommendation to transact. All numerical examples are hypothetical and exclude costs unless stated. Actual terms, eligibility, tax treatment and broker procedures depend on the security and jurisdiction.

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