Investing term
What is Currency hedging?
An overlay used by some international ETFs to remove the effect of currency moves, so you get the foreign stock return in your home currency.
Currency hedging is an overlay some international funds use to strip out the effect of exchange-rate moves, so you earn the foreign stock's return in your home currency without the currency swings mixed in. When you invest abroad, your return normally combines two things: how the foreign stocks did, and how the foreign currency moved against yours. Hedging removes the second part.
Whether to hedge is a genuine trade-off, not a clear win. For stocks, currency movements add volatility but tend to wash out over the long run, and hedging costs a little, so many long-term stock investors leave international equities unhedged and accept the currency noise. For bonds, where the whole point is stability, currency swings can dwarf the modest returns, so hedging foreign bonds back to your home currency is more commonly favoured. The right choice depends on the asset, your horizon, and your tolerance for the extra volatility currency adds.
Investing abroad quietly adds a second bet — on exchange rates. Hedging strips it out: often left on for stocks (the swings wash out long-run) and taken off for bonds (where they'd dwarf the return).
For example
A euro investor buys a US stock fund: unhedged, their return mixes the US stocks' performance with euro-dollar moves; a currency-hedged version removes the euro-dollar effect, leaving just the stock return.
Learn it by doing
That's Currency hedging in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 19, Beyond Stocks).
Try the free lesson →Why it matters to you
Currency hedging matters because investing internationally quietly adds a second bet — on exchange rates — that many investors don't realise they're making. Understanding the choice lets you decide deliberately: accept currency swings for the diversification and simplicity (common for long-term stocks), or hedge them away for stability (common for bonds). Since the decision differs by asset and horizon, knowing what hedging does — and its small cost — helps you match it to what each part of your portfolio is for.
⚠ Ignoring the currency bet in foreign holdings
Buying an international fund without noticing whether it's hedged means unknowingly taking on a currency bet alongside the investment bet. For foreign bonds especially, currency swings can overwhelm the modest returns you were seeking, turning a 'safe' holding volatile. Check whether an international fund is hedged, and decide deliberately rather than by accident.