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04 December 2025
Currency hedging is a tool used to manage exposure to currency fluctuations for investments with exposure to international assets such as equities or bonds. While it aims to limit the effects of these movements on your investment returns, there are important pros and cons for investors to consider.
Currency hedging is a tool that can be used to manage the impact of exchange rate movements for investments with exposure to international equities or bonds.
Fund managers use tools like foreign exchange (FX) forwards to hedge currency risks in Exchange Traded Funds (ETFs).
Hedged ETFs can benefit investors when the Australian dollar (AUD) is strong and rising, while unhedged ETFs may benefit investors when the AUD is weaker and falling.
Short-term performance between hedged and unhedged investments can differ significantly though these differences in performance may ‘wash out’ over the long run.
Unhedged exposures to global equities have had the advantage of being more defensive during major share market selloffs, as historically the AUD has also fallen during those periods so the positive exchange rate effect has offset the fall of the global share investments.
On the other hand, hedged exposures can make sense when you take the view that the AUD is likely to rise in the future. This is because a stronger AUD can reduce the value of overseas investments and, by hedging, you can remove the currency impact and ensure the fund’s performance more closely reflects only the underlying asset returns.
When you invest in an ETF that holds global equities, you are exposed to two different prices: the price of the underlying stocks, and the price of the currency they trade in. If, for example, the ETF invests in stocks that are only listed on the NASDAQ or S&P 500 in US dollars (USD), and the value of the USD rises against the Australian dollar (AUD), your returns will be higher when these are converted back to AUD.
Effectively, you receive an equity market return plus a currency market return. However, in the example above, if the AUD strengthens against the USD, your global investment returns would be lower.
Some investors choose to hedge against currency movements by investing in a currency hedged ETF, to take currency movements out of the equation and link their investment exposure more closely to the performance of the underlying stocks.
Hedging is like taking out insurance for your foreign investments. When you invest in shares from overseas, their value can go up or down not just because of the stock market, but also because of changes in currency. Hedging aims to protect your money from big swings in foreign exchange rates. It helps smooth out the ups and downs caused by currency movements, so your returns are more closely linked to how the stocks themselves are performing, rather than what’s happening with the Australian dollar.
Professional fund managers have access to various tools in order to hedge out currency risks. Most ETFs use foreign exchange (FX) forwards to manage currency risk. FX forwards are typically monthly contracts that secure today’s exchange rate for a future transaction, providing certainty and protection against currency volatility.
Professional fund managers employ these tools within ETFs to mitigate the impact of currency fluctuations and enhance portfolio stability. While hedging may limit the benefits of favourable currency movements, it can also provide a buffer against adverse currency shifts which may impact the underlying investment return.
Choosing between an unhedged or hedged ETF is not always an easy decision to make, but it is an important one. Here are some considerations for investors:
Over the long-term, as shown in Figure 1, historical data shows marginally higher returns for the hedged version of the MSCI World ex Australia global equities benchmark compared to unhedged (9.8% pa versus 9.5% pa), at the cost of higher volatility (14.3% pa versus 11.5% pa).
Although currency hedging aims to reduce the currency impact on portfolio returns, it may inadvertently result in higher overall volatility of returns over the long run.
Source: Morningstar, Bloomberg, MSCI, for the period from 31 March 2005 to 30 September 2025. Shaded areas refer to all drawdowns for the MSCI World ex Australia Hedged Index greater than 15% since March 2005.
Over shorter timeframes, however, unhedged returns have often exceeded hedged returns by a significant amount, and vice versa. For example, between 1 July 2021 and 30 June 2024, the unhedged MSCI World ex Australia Index returned 11.2% pa, compared to hedged returns of 7.0% pa.
So why can hedged and unhedged performance vary so significantly over the short term? There are many factors at play, including of course the performance of the Australian dollar against major currencies, but also interest rates around the world, and the interactions between currency and equity markets.
With global equities now seen as a core portfolio allocation for Australian investors, thanks to their return potential and diversification benefits, more investors will need to consider whether, and when, to hedge.
Australian investors’ portfolios were traditionally weighted towards homegrown shares on the ASX. However, as shown in Figure 2, the average Australian super fund now has an even larger allocation to international shares. Interestingly, over three-quarters of this international exposure is not hedged against currency movements.
Source: APRA, Quarterly Superannuation Statistics, June 2025.
One reason for this is that during major share market selloffs, investors tend to seek shelter in ‘safe haven’ assets, such as the USD, rather than those they perceive as higher risk commodity currencies like the AUD. As a result, the AUD is more likely to depreciate - and this can act as a buffer against global market weakness.
Unhedged global exposures benefit from a falling AUD. We saw this during the global financial crisis, when the AUD/USD fell by around -31%. The unhedged MSCI World ex Australia Index returned -33%, and the MSCI World ex Australia Hedged Index returned a significantly more extreme -51%1.
As shown in Figure 3, we see a similar cushioning effect from AUD depreciation in all market declines, also known as drawdowns, over the last 20 years in which the MSCI World ex Australia Hedged Index fell by more than 15%.
Past performance is not a reliable indicator of future performance. Source: Morningstar, Bloomberg, MSCI, for the period from 31 March 2005 to 30 September 2025. Drawdown periods calculated using monthly return data.
Since the Australian dollar was first floated in December 1983, its price relative to the USD (and other currencies) has been set by buyers and sellers in the market.
Over the decades since, as shown in Figure 4, the AUD has traded as low as 0.479 USD (on 2 April 2001), and as high as 1.102 USD (on 27 July 2011). As at the end of September 2025, for each Australian dollar you could get 66.1 US cents. The Australian dollar has historically traded below this exchange rate less than 25% of the time.
Source: Bloomberg, for the period from 12 December 1983 to 30 September 2025.
If you take the view that the Australian dollar is currently ‘cheap’, and likely to rise, it may make sense for you to hedge some or all of your global equity exposures. As mentioned previously, a rising Australian dollar hurts the value of offshore assets and currency hedging can protect you from the effects of currency movements.
Conversely, if you believe that the Australian dollar is currently ‘expensive’ relative to other currencies, and particularly the USD given the large weight of US shares in the global equity index, choosing unhedged global equity exposures would position your portfolio to benefit from a falling AUD.
In this way, choosing between hedged or unhedged global equity exposures is one way to implement a currency view within your portfolio.
As the table below shows, there are considerations for a portfolio’s broader currency exposures and the risk-return profile, as well as the market outlook and your time horizon. Ultimately, your hedging level is not just about seeking additional returns, it is also an important tool to help manage risk.
| Considerations for global equity portfolios | Unhedged | Hedged |
| Currency exposure | Exposed to swings in currency movements. AUD rising hurts investment returns, AUD falling helps investment returns. | Aims to reduce exposure to currency movements from investment returns. |
| Equity market correction | Has historically outperformed given the AUD tends to fall when global equity markets fall. | Has historically underperformed given the AUD tends to fall when global equity markets fall. |
| Implementing a currency view | For investors who view the AUD as expensive and more likely to fall than to rise. | For investors who view the AUD as cheap and more likely to rise than to fall. |
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Important information
The Macquarie Core Global Equity Active ETF and the Macquarie Core Global Equity (Hedged) Active ETF are designed for consumers who: are seeking capital growth and income distribution, are intending to use the Fund as a core component, minor or satellite allocation within a portfolio, have a minimum investment timeframe of five years, have a high or very high risk/return profile for that portion of their investment portfolio, and require the ability to have access to capital within one week of request.
The Target Market Determination (TMD), available at macquarie.com/mam/tmd, includes a description of the class of consumers for whom the Fund is likely to be consistent with their objectives, financial situation and needs.
The Macquarie Core Global Equity Active ETF is a separate class of units in the Macquarie Core Global Equity Fund (ARSN 674 553 201). A separate class of units is not a separate managed investment scheme.
The Macquarie Core Global Equity (Hedged) Active ETF is separate classes of units in the Macquarie Core Global Equity Fund (Hedged) (ARSN 673 288 018). A separate class of units is not a separate managed investment scheme.