Should a foreign fund hedge its currency?

Buy a fund of European and Japanese shares with dollars and you own two things: the shares, and the euros and yen they are priced in. A currency-hedged fund keeps the first and removes the second. The same basket exists in both forms, which makes the choice measurable rather than theoretical.

The pair

EFA.US holds about 650 developed-market shares outside the US, unhedged. HEFA.US delivers the same basket — it holds units of EFA itself, plus forward contracts that offset the currency exposure back into dollars — so its published holdings look through to the same 658 names in the same weights. Same shares, same manager, fees of 0.33% and 0.35% on the funds' records on 2026-09-04. Everything that differs between their returns is the currency.

Measured on adjusted closes to 3 September 2026:

Over five years the hedged fund returned two thirds more than the unhedged one, on identical shares. That entire gap is the dollar strengthening against the basket's currencies over the window — mostly the yen, which went from 109.7 to 155.8 per dollar between 2021-09-03 and 2026-09-03 while the euro moved about 2% — plus the interest-rate differential the hedge earned. Reverse the currency move and the table reverses with it. The forex domain's parity lesson is where the differential comes from; here the point is its size relative to the shares' own return.

What a hedge costs and pays

A hedge is not free and it is not a fee. Rolling forward contracts costs roughly the difference between the two currencies' short-term interest rates. When dollar rates are higher than euro and yen rates, a dollar investor hedging foreign shares is paid that difference — which is part of the five-year figure above. When the differential runs the other way, the hedge costs it. The fee difference between the two funds, two hundredths of a percent, is the smallest number in the decision.

Which risk, not which return

Hedged or unhedged is a decision about which risk you want to hold, not about which return will be higher. Unhedged, your foreign shares carry a currency position you did not choose, which sometimes offsets the shares' moves and sometimes doubles them. Hedged, you hold the shares and a known carry. Over long horizons currency moves have tended to wash out for major pairs, which is the argument for not paying attention; over any five years they have not, which is the table above.

A portfolio builder who can say "I hold foreign shares unhedged, so a strong dollar hurts me, and here is by how much last time" has made a decision. One who did not know there were two versions has had it made for them.

In the data

The two funds' records show the same shares; only the hedged one's name says Hedged. The difference sits in the currencies. The two that matter most for this basket, at both ends of the five-year window:

Yen per dollar rose by about two fifths, a much stronger dollar against the yen; dollars per euro barely moved. Set those beside the fund charts below and you can split the gap between the two funds yourself: what the shares did, and what the currencies did to a dollar holder of them.

Try it now

1. Measure the same five years on both funds and confirm the table:

2. Now the currency that did most of the work, over the same window. A rising line here is a stronger dollar against the yen, which is the direction that hurts the unhedged holder. The euro, for comparison, moved only about 2% over the same five years:

3. Name which fund you would hold and which risk that leaves you carrying. Either answer is defensible; only "I did not know" is not.