ASX exchange-traded funds (ETFs) provide an easy-peasy way to invest in international shares via our local exchange.
US stocks are particularly popular given the S&P 500 Index (SP: INX) has outperformed the S&P/ASX 200 Index (ASX: XJO) for three years.
The two biggest ETFs by market capitalisation that provide exposure to the US market are iShares Core S&P 500 AUD ETF (ASX: IVV) and Vanguard MSCI Index International Shares ETF (ASX: VGS).
IVV ETF tracks the S&P 500, while VGS tracks the MSCI World ex-Australia (with net dividends reinvested) AUD Index.
About 70% of the VGS portfolio is US stocks.
Neither ETF has currency hedging, and this eroded returns for Aussie investors last year given the weaker USD against the AUD.
The Aussie dollar rose from about 62 US cents in January 2025 to about 67 US cents by December.
Our currency reached a three-year high of 71 US cents last month. It is 69.65 US cents at the time of writing.
The US dollar has been weakening due to expectations of US interest rate cuts, concern over the economic impact of new tariffs, and broader geopolitical and trade uncertainties.
Meanwhile, the AUD is stronger amid expectations of rate hikes in 2026 and strong demand for Australia's commodities, particularly gold.
This extra demand supports our currency because foreign buyers must pay for our exports in Australian dollars.
Rising commodity prices amplify the total demand for the AUD even further.
With all this at play, should ASX ETF investors consider switching into, or buying, products with currency hedging to insulate their returns?
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Vanguard's take on currency hedging
Major ASX ETF provider Vanguard describes the pros and cons of hedging as follows:
For investors, a strengthening AUD would be a headwind for unhedged portfolios, reducing returns on international assets.
Conversely, a weaker AUD boosts unhedged returns and benefits Australian companies earning profits overseas.
Vanguard says short-term volatility in currencies is inevitable, and hedging is more about managing long-term risk rather than chasing returns.
Hedging is not a one-size-fits-all decision.
The choice should come after building a plan, setting an asset allocation and considering costs.
The decision doesn't have to be all-or-nothing either.
Many investors and their advisers aim for a "least regret" approach by hedging around 50% of the portfolio.
A word from Global X
Justin Lin, from ETF provider Global X, said foreign exchange and currency exposure has been front of mind for investors in recent times.
Lin says AUD currency-hedged ETFs are best viewed as "tools for short-term, tactical asset allocation rather than long-term buy and hold".
Investors may want to consider tactical currency hedging when they expect significant fluctuations in exchange rates that could impact their returns.
For example, if interest rates are rising in their home country but decreasing or unchanged in the country where they hold investments.
In this scenario, the home currency may appreciate, reducing the value of their foreign investments.
Hedging options with ASX ETFs
Vanguard and other ETF providers offer currency-hedged versions of some of their most popular ASX exchange-traded funds.
For example, VGS is unhedged, while Vanguard MSCI Index International Shares (Hedged) ETF (ASX: VGAD) is its hedged counterpart.
Take a look at their performance in 2025.
As you can see, the percentage of price growth between VGS and VGAD widened over the year as the AUD strengthened against the USD.
So, VGAD did better.
Here's another example.
Last year, the S&P 500 delivered total returns, including dividends, of 17.88%. However, IVV ETF investors received a total return of 10.75% due to the impact of the currency exchange.
The hedged version of IVV ETF is iShares S&P 500 (AUD Hedged) ETF (ASX: IHVV), which returned 16.88% (after fees).
As you can see below, IHVV began outperforming IVV in terms of the percentage of capital growth in April last year.
In the end, IHVV did best.
