It's been a "tarrifying" last few months on the stock market. Simultaneously, the Australian dollar has tumbled to its lowest point since March 2020.
The Australian dollar was trading as low as 59.33 US cents yesterday. For context, it was as high as 69 US cents late last year.
This is important for many reasons, but for investors, it can impact the returns of US focussed funds.
Hedged vs non-hedged ETFs
So what does "hedged" and "non-hedged" mean in the context of ETFs (Exchange-Traded Funds)?
If the ETF aims to protect from fluctuations between the base currency and the currency of the investor it's hedged.
A non-hedged ETF does not protect against currency movements.
So, in the case of US focussed ETFs, which is better?
Let's look at an easy comparison between two funds that both track the NASDAQ-100 Index (NASDAQ: NDX).
BetaShares NASDAQ 100 ETF (ASX: NDQ)
This fund aims to track the performance of the NASDAQ-100 Index (NASDAQ: NDX). This index includes the 100 largest non-financial companies listed on the NASDAQ stock exchange.
The fund is also unhedged.
This means the ETF does not take any steps to protect or offset the impact of currency fluctuations between the Australian dollar (AUD) and the US dollar (USD).
It has not been immune to the rough start to 2025, falling 19.04% during that span.
Betashares Nasdaq 100 ETF – Currency Hedged (ASX: HNDQ)
This ETF also aims to track the performance of the NASDAQ-100 Index (NASDAQ: NDX). However in this case, the foreign currency exposure is hedged back to the Australian dollar.
It has fallen 21.71% this year despite the fund's objective to minimise the effect of currency fluctuations on returns.
Which is better?
The ebbs and flows of a currency value can be difficult to predict (much like the stock market).
Let's hypothetically project the US stocks in these ETFs rise by 5% in USD terms.
If the AUD strengthens against the USD by 3%, this would reduce the gain when converted back to AUD. That's because the value of your investment in AUD terms would decrease due to the stronger Australian dollar.
Conversely, if the AUD weakens by 3% against the USD, your 5% gain could be amplified when converted to AUD.
Generally, conventional wisdom says to buy the hedged ETF when the Australian dollar is low, and buy the unhedged version when the Aussie is high against other currencies.
At the time of writing, the theory would suggest buying a hedged ETF like HNDQ.
However it can be difficult to predict just how low (or high) the Aussie dollar, and the NASDAQ 100 are likely to go in this (or any) economic climate.
The performance of these funds in 2025 also shows this isn't a perfect science. The hedged fund has actually fallen more than the non-hedged fund this year.
The road ahead
Here at The Motley Fool, we are long-term investors.
So if we zoom out a little, and try not to be a prisoner of the moment, you might feel reassured knowing the NASDAQ 100 has had a positive return during 14 of the 17 years between 2008 and 2024.
It has had a return of 109.02% over the last five years.
Therefore, if you are an investor with time on your side and are interested in a US based ETF, you don't need to time the market to perfection.
It might fall further, but it also could be a long time before you can buy shares in 100 of the largest US blue-chip companies at such a discount.
