Hedged vs Unhedged ETFs: Currency Risk Made Simple

Some Tokyo-listed ETFs invest in foreign assets, such as U.S. stocks or overseas bonds. You buy the ETF in yen, but the assets inside may be priced in dollars, euros, or another currency.

That means your return can move for two reasons: the foreign asset price changes, and the yen exchange rate changes. This second part is currency risk.

Unhedged ETFs leave currency moves in the return. If the yen gets weaker, foreign assets are worth more in yen. If the yen gets stronger, foreign assets are worth less in yen.

ETF Note currently groups 35 listings on the Unhedged ETFs page.

Hedged ETFs try to reduce the effect of currency moves. A yen-hedged U.S. stock ETF, for example, tries to make the return closer to the U.S. stock return itself, with less USD/JPY impact.

ETF Note currently groups 56 listings on the Hedged ETFs page.

Imagine U.S. stocks rise 10%. If the yen also gets weaker, an unhedged ETF may rise more than 10% in yen terms. If the yen gets stronger, the same unhedged ETF may rise less than 10%.

A hedged ETF may stay closer to the 10% stock return, but it may also miss the extra gain from a weaker yen.

Unhedged ETFs include the yen exchange-rate effect in the return. Hedged ETFs try to reduce that currency impact and focus more on the foreign asset itself.

When comparing these funds, review the ETF fee, index, issuer, trading unit, and whether the fund is hedged or unhedged on the ETF page.