Ask an Australian investor whether to hedge their international shares and you will usually get an answer shaped by whatever the dollar has done recently. That is the problem.
For most of the past fifteen years the Australian dollar drifted lower, which handed unhedged investors a steady tailwind and made “just go unhedged” sound like settled wisdom. That trend has reversed. The AUD has climbed meaningfully off its lows, and hedged funds have recently outperformed their unhedged equivalents across most categories. Predictably, the question is being asked again, and a lot of people are about to switch based on one year of relative performance.
The decision deserves better than that. Currency exposure is a genuine risk that changes the shape of your portfolio, and the right answer for an Australian investor is less obvious than it first appears.
What hedging actually does
When you buy an unhedged international ETF, you are buying two things: the underlying shares, and the foreign currency they are priced in. Your return in Australian dollars depends on both.
If the AUD falls after you invest, your foreign assets convert back into more Australian dollars, which lifts your return. If the AUD rises, the same assets convert into fewer dollars, which drags on it.
A currency hedged ETF strips that second element out. The fund uses currency forward contracts to neutralise movements between the AUD and the currencies of the underlying holdings, so your return tracks the underlying market and little else.
Neither version is the safe one by default. They are exposed to different risks, and the useful question is which risk fits your portfolio.
The point most Australians miss
Here is the fact that should anchor the whole decision, and it runs against intuition.
For an Australian investor, unhedged international shares have historically been less volatile than hedged ones, not more.
The reason has nothing to do with share markets. The Australian dollar is a risk-sensitive currency. When global markets fall and investors move toward safety, the AUD typically falls too. Because a falling AUD lifts the Australian dollar value of your offshore holdings, that currency movement partly offsets the fall in the shares themselves.
The global financial crisis is the clearest illustration. The AUD/USD fell by roughly 31%. Over that period the unhedged MSCI World ex Australia Index returned about negative 33%, while the hedged version of the same index returned close to negative 51%. Australian investors who had removed their currency exposure experienced a far deeper drawdown in the worst market of their lifetimes.
That cushioning effect has shown up across major drawdowns over the past two decades, not just in 2008. The RBA’s own Deputy Governor has publicly described the Australian dollar as a well-functioning natural hedge for global risk assets.
This is close to a structural feature of the Australian economy. Our currency is tied to commodity prices and global growth expectations, both of which weaken in a downturn. It is not a guarantee, and it has failed before, but it is a persistent relationship rather than a coincidence.
Then why has hedging been winning lately?
Because the AUD has been rising, and a rising AUD is exactly the environment where hedging pays.
The dollar spent 2025 and the first part of 2026 climbing off multi-year lows, supported by commodity demand and by expectations that Australian and US interest rates would move in different directions. Over that stretch, hedged funds beat their unhedged counterparts by a wide margin across most categories.
That is real, and it is a legitimate reason to think about hedging. It is not, however, a reason to switch after the move has happened. Selling unhedged exposure once the AUD has already risen locks in the currency headwind you just experienced and positions you for the currency to fall again, which is precisely backwards.
Over long periods, the average returns of hedged and unhedged global equities have been broadly similar. The difference is almost entirely timing. Anyone claiming one is durably superior is describing a period, not a principle.
Does currency add return?
Not in any reliable way. Over long horizons, exchange rate movements are approximately a zero-sum exercise. Currency is not a productive asset. It generates no earnings and pays no dividends.
What currency does is change your risk. For Australians holding growth assets, as described above, that change has generally been favourable. That is the entire argument for leaving equity exposure unhedged, and it rests on the correlation, not on any expectation that the AUD will keep falling.
What hedging costs
Hedging is not free, and the costs are easy to overlook because most of them do not appear as a line item.
A higher management fee. Hedged versions of the same fund usually carry a higher MER than their unhedged twin. The gap is often small in absolute terms but it compounds.
Transaction and rolling costs. Forward contracts expire and must be rolled, typically monthly. That activity has a cost borne inside the fund.
The interest rate differential. This is the one almost nobody understands. Currency forwards price in the gap between Australian and foreign interest rates. Where Australian rates sit above foreign rates, hedging back to AUD tends to earn a small positive return over time. Where they sit below, it costs you. This is not a fee anyone charges, it is embedded in the forward pricing, and it can meaningfully help or hurt depending on the rate cycle. Check where the differential currently sits rather than assuming.
Tracking imprecision. A hedge is usually set against the fund’s value at a point in time and rebalanced periodically. Between rebalances the hedge ratio drifts, so hedged funds rarely deliver a perfectly clean removal of currency.
The tax angle worth understanding
Hedging changes how much of your return arrives as taxable distributions rather than as unrealised capital growth.
Gains on the currency forward contracts inside a hedged fund are realised as those contracts are rolled, and generally flow through to you as part of the fund’s distributions. In a year where the AUD rises, a hedged fund can therefore distribute a sizeable amount of taxable income even though the fund’s unit price has gone nowhere.
An unhedged fund, by contrast, leaves the currency effect embedded in the unit price, where it stays unrealised and untaxed until you sell.
Historically that made hedged funds noticeably less tax-efficient for investors on high marginal rates holding assets outside super, because deferred capital growth eventually taxed at a discounted rate beat distributions taxed at full marginal rates each year.
The capital gains tax changes taking effect from 1 July 2027 narrow that gap somewhat, since the concession available on eventual capital gains is changing. The deferral advantage remains real, because tax paid later is worth less than tax paid now, but the size of the penalty on hedged funds is worth remodelling rather than assuming from older analysis. Inside superannuation, where earnings are taxed at concessional rates, the distinction matters far less.
Where hedging is not optional
Everything above concerns growth assets. For international bonds, the answer is different and much less debatable.
Global bonds are held for stability. Their own volatility is low, typically far below that of shares. Currency volatility is not low. Leaving an international bond allocation unhedged means the currency movement dominates the return and the holding stops behaving defensively at all, which defeats the reason you own it.
This is why almost all global bond products sold to Australian investors are hedged, and why it is generally the right default. If you hold international fixed income, check that it is hedged.
The general shape of a sensible position for many Australians is unhedged, or partly hedged, growth assets, and hedged defensive assets.
How to actually decide
A few questions do more work than any forecast.
What is your time horizon? Currency effects are loud over one to three years and much quieter over fifteen. If you are investing for a house deposit in two years, currency risk is a live concern. If this is a thirty-year retirement portfolio, it matters far less than your asset allocation.
How much international exposure do you have? Many Australian portfolios are heavily concentrated in domestic shares, which is its own problem, covered in our piece on home bias. If international assets are a small slice of your portfolio, the hedging decision is a second-order question.
What will you actually spend the money on? You will retire in Australian dollars, which is the standard argument for hedging. But if your plans involve significant overseas travel, or if you are conscious that a weaker AUD raises the price of imported goods, unhedged exposure has a real-world offset that a spreadsheet will not capture.
What can you hold through? A portfolio you abandon at the bottom is worse than a theoretically optimal one. If watching your international holdings swing on currency moves would push you to sell, that is a genuine input.
Three reasonable approaches
Fully unhedged growth assets. The simplest option and the one most consistent with the defensive characteristics described above. Lower cost, more tax-efficient outside super, and it accepts that some years will look poor when the AUD rises.
A split. Holding a portion hedged, commonly somewhere between a quarter and a half, reduces the range of outcomes and reduces the regret of having been wholly wrong in either direction. For investors who find currency swings unsettling, the behavioural benefit can outweigh the modest cost.
Hedging at the margin. Some investors leave existing holdings alone and vary only how new contributions are directed, hedging new money when the AUD looks historically low and leaving it unhedged when the dollar looks high. This is a mild currency view rather than a neutral position, and it should be treated as such.
What is difficult to defend is switching the whole allocation back and forth in response to recent performance, which reliably means buying the currency protection after you needed it.
What to check before you buy either one
Compare the management fee against the unhedged equivalent, since it is the most visible ongoing difference. Confirm the fund tracks the index you actually want, because hedged and unhedged versions occasionally follow different benchmarks. Check the hedge ratio and how often it is rebalanced. Look at tracking difference over several years rather than the stated fee alone. And look at the distribution history, so a large hedging-driven distribution does not arrive as a surprise at tax time.
Where this fits
Currency hedging is a portfolio construction decision, not a product decision, and it only makes sense alongside your asset allocation, your time horizon, your tax position and where your assets are held. The same investor can sensibly hold unhedged international shares personally and hedged global bonds inside superannuation.
If you would like help thinking through how much currency exposure belongs in your portfolio, our financial planning team can work through it with you.
Frequently asked questions
Are hedged or unhedged ETFs better for Australian investors?
Neither is universally better. Over long periods the average returns of hedged and unhedged global equities have been broadly similar, with the difference coming down to timing. For growth assets, unhedged exposure has historically been more defensive for Australian investors because the AUD tends to fall when global markets fall, cushioning the loss in Australian dollar terms. For international bonds, hedging is generally the right default.
Why did hedged ETFs fall harder than unhedged ones in the GFC?
Because the Australian dollar fell around 31% during that period. For unhedged investors, that currency movement offset much of the share market decline, and the unhedged MSCI World ex Australia Index returned roughly negative 33% while the hedged version returned close to negative 51%. Removing currency exposure also removed the cushion.
Should I switch to hedged ETFs now that the Australian dollar has risen?
Switching after a currency move has already occurred means realising the headwind you just experienced and positioning for the currency to move back the other way. If you have a considered reason to change your currency exposure, that is a portfolio decision worth making. Reacting to twelve months of relative performance is usually not one.
Do hedged ETFs cost more?
Generally yes, in several ways. The management fee is typically higher than the unhedged equivalent, forward contracts must be rolled at a cost inside the fund, and the interest rate differential between Australia and the relevant foreign markets is embedded in the forward pricing, which can help or hurt depending on the rate cycle.
Are hedged ETFs less tax-efficient?
Often, for investors holding assets outside superannuation. Gains on the currency forwards inside a hedged fund are realised and generally distributed as taxable income, so a hedged fund can produce a large distribution in a year when the AUD rises even if the unit price has not moved. An unhedged fund leaves the currency effect unrealised in the unit price until you sell. The capital gains tax changes commencing 1 July 2027 narrow this gap somewhat, so it is worth modelling rather than assuming.
Should I hedge international bonds?
Generally yes. Bonds are held for stability, and their own volatility is low relative to currency volatility. An unhedged global bond allocation is dominated by exchange rate movements and stops behaving defensively, which undermines the reason for holding it. Most global bond funds available to Australian investors are hedged for this reason.
Can I hold both hedged and unhedged versions?
Yes, and many investors do. Holding a portion hedged narrows the range of possible outcomes and can make a portfolio easier to stay invested in. Somewhere between a quarter and a half hedged is a common approach for investors who want to reduce currency swings without giving up the defensive characteristics of unhedged exposure entirely.
General advice warning. This article contains general information only and does not take into account your objectives, financial situation or needs. It is not a recommendation to buy, hold or sell any financial product. References to specific index returns and exchange rate movements are historical, and past performance is not a reliable indicator of future performance. You should read the relevant product disclosure statement and target market determination, consider whether the information is appropriate for you, and seek personal financial advice before acting on any of it.
