Many investors use these funds to gain exposure to international markets like the S&P 500 Index (SP: .INX) or NASDAQ-100 Index (NASDAQ: NDX).

However when you choose funds that track these markets, you might be faced with the decision of hedged or unhedged funds. 

That's because these funds are tracking companies based in other countries. 

What is currency hedging?

Currency-hedged ETFs are exchange-traded funds that are designed to reduce (or eliminate) the impact of exchange rate fluctuations on investment returns when investing in foreign assets.

When you invest in international stocks or bonds, you're exposed not just to the performance of those assets, but also to changes in the foreign currency against your home currency.

This year, the Australian dollar has been volatile compared to the USD. The value of $1 AUD fell as low as 60 US cents in April, and has slowly climbed back to around 65 US cents at the time of writing. 

Let's look at how this has impacted ETFs that track the S&P 500 Index (SP: .INX). 

Impact on non-hedged ASX ETFs 

If you own a non-hedged ASX ETF that tracks a US index like iShares S&P 500 ETF (ASX: IVV), your returns are affected by:

• The performance of the S&P 500 (in USD)
• The AUD/USD exchange rate

When AUD is weak like it was in April (around 60¢), each USD of S&P 500 return converts into more AUD. This means your returns in AUD increase and you benefit from currency depreciation. 

However, when the AUD strengthens, each USD is worth fewer AUD. This means your AUD returns fall, even if the S&P 500 rises in USD. 

Hedged ETFs 

Now lets look at a hedged fund, like iShares S&P 500 AUD Hedged ETF (ASX: IHVV).

This ETF hedges currency exposure using derivatives, aiming to keep returns in AUD terms only reflecting the S&P 500.

Whether the AUD goes up or down doesn't materially affect returns.

You're only exposed to the S&P 500's actual performance, not currency fluctuations.

Are hedged ASX ETFs better?

Unfortunately, it's not as simple as which option is better or worse. It largely depends on your risk appetite and personal preference. 

Over the long term, currency fluctuations will likely balance out. 

However, some investors may prefer to avoid these rises and falls, particularly if you invest in funds that are exposed to more volatile economies. 

What are some common hedged funds?

If you are looking to invest in currency hedged ETFs, here are some to consider: 

• Betashares Nasdaq 100 ETF – Currency Hedged (ASX: HNDQ)
• Vanguard MSCI Index International Shares (Hedged) ETF (ASX: VGAD)
• Betashares Global Quality Leaders ETF – Currency Hedged (ASX: HQLT)
  

Some more thematic options include: 

• BetaShares Global Healthcare ETF – Currency Hedged (ASX: DRUG)
• Vaneck Msci International Small Companies Quality (Aud Hedged) Etf (ASX: QHSM)

The post Is it a good time to focus on currency hedged ASX ETFs? appeared first on The Motley Fool Australia.

The simplest and most well-known are those that track the performance of indexes such as the S&P/ASX 200 Index (ASX: XJO) and the S&P 500 Index (SP: .INX) in the US.

Other ASX ETFs track certain sectors, such as the Australian Resources Sector ETF (ASX: QRE) and VanEck Australian Banks ETF (ASX: MVB).

Many ASX ETFs adopt certain strategies. For example, the top five Aussie shares ETFs for total returns in 2023 all had environmental, social, and corporate governance (ESG) strategies.

All of these ASX ETFs have a manager running them and their fees depend on how much work is involved.

You don't have to do much to manage an index fund, for example.

Every quarter the index is officially updated, and the ETF managers follow suit by adding or removing companies and rejigging the weightings in accordance with each company's market capitalisation.

This is all pretty simple but some ETFs charge more than others for this service.

This is why it's important to check the management expense ratio (MER) that an ETF charges before buying it.

Bear in mind that ASX ETFs with strategies will generally charge higher fees.

This is because the managers are selecting stocks on your behalf, which requires more skill and expertise.

As a general rule, the lower the management fee the better because those fees eat into your returns.

While past performance is no guarantee of future performance, it's worth looking at the history of all the ASX ETFs you're interested in and comparing the fees to determine which funds offer the best value.

We reviewed more than 300 ASX ETFs listed on CommSec to find those with the lowest MERs.

10 ASX ETFs with the lowest management fees

BetaShares Global Sustainability Leaders ETF-Currency Hedged (ASX: HETH)

The BetaShares Global Sustainability Leaders ETF-Currency Hedged invests in BetaShares Global Sustainability Leaders ETF (ASX: ETHI) with the currency exposure hedged back to the Australian dollar.

ETHI invests in companies deemed to be 'climate leaders'.

The HETH ETF share price is currently $14.17, up 22.37% over the past 12 months.

Over the past five years, it has risen 41.70%.

MER: 0.03%.

BetaShares Global Quality Leaders ETF-Currency Hedged (ASX: HQLT)

The BetaShares Global Quality Leaders ETF-Currency Hedged invests in the BetaShares Global Quality Leaders ETF (ASX: QLTY) with the currency exposure hedged back to the Australian dollar.

QLTY holds 150 global companies (ex-Australia) ranked in order of a quality score. The scores are based on a combined ranking of four key factors – return on equity (ROE), debt-to-capital, cash flow generation and earnings stability.

The HQLT ETF share price is currently $29.42, up 28.58% over the past 12 months.

Over the past five years, it has risen 49.49%.

MER: 0.03%.

VanEck MSCI International Value (AUD Hedged) ETF (ASX: HVLU)

The VanEck MSCI International Value (AUD Hedged) ETF holds 250 international developed-market large-caps and mid-caps with high scores as calculated by MSCI and returns hedged into Australian dollars.

The HVLU ETF share price is currently $27.42, up 14.49% since inception in November 2023.

MER: 0.03%.

VanEck MSCI International Small Companies Quality (AUD Hedged) ETF (ASX: QHSM)

The VanEck MSCI International Small Companies Quality (AUD Hedged) ETF invests in 150 international developed-market small-cap quality growth shares with returns hedged into Australian dollars.

The QHSM ETF share price is currently $30.08, up 26.02% since inception in November 2023.

MER: 0.03%.

Vanguard US Total Market Shares Index ETF (ASX: VTS)

The Vanguard US Total Market Shares Index ETF is an index-based ETF that tracks the performance of the whole United States stock market, incorporating more than 3,700 American US companies.

The VTS ETF share price is currently $389.92, up 27.68% over the past 12 months.

Over the past five years, it has risen 87.89%.

MER: 0.03%.

BetaShares Australia 200 ETF (ASX: A200)

The BetaShares Australia 200 ETF is an index-based ETF that tracks the performance of the ASX 200.

The A200 ETF share price is currently $130.47, up 7.30% over the past 12 months.

Over the past five years, it has risen 24.78%.

MER: 0.04%.

iShares S&P 500 ETF (ASX: IVV)

The iShares S&P 500 ETF is an index-based ETF that tracks the performance of the 500 largest US companies comprising the S&P 500.

The IVV ETF share price is currently $52.45, up 27.71% over the past 12 months.

Over the past five years, it has risen 92.97%.

MER: 0.04%.

SPDR S&P/ASX 200 ESG (ASX: E200)

The SPDR S&P/ASX 200 ESG invests in ASX 200 shares excluding companies involved in military contracting, small arms and tobacco, oil and thermal coal above a certain threshold.

The E200 ETF share price is currently $24.82, up 4.99% over the past 12 months.

It has risen 22.33% since its inception in August 2020.

MER: 0.05%.

iShares Core S&P/ASX 200 ETF (ASX: IOZ)

The iShares Core S&P/ASX 200 ETF tracks the performance of the ASX 200 Accumulation Index.

The IOZ ETF share price is currently $31.49, up 7.07% over the past 12 months.

Over the past five years, it has risen 22.96%.

MER: 0.05%.

SPDR S&P/ASX 200 (ASX: STW)

Launched in August 2001, the SPDR S&P/ASX 200 was Australia's first listed ETF. It tracks the performance of the ASX 200 index.

The STW ETF share price is currently $70.47, up 6.50% over the past 12 months.

Over the past five years, it has risen 21.06%.

MER: 0.05%.

The post 10 ASX ETFs with the lowest management fees and why it matters appeared first on The Motley Fool Australia.