Investing across borders opens up new opportunities for yield, growth, and diversification. But with international investing comes exposure to foreign currencies—and that means currency risk.If your home currency is the euro, US dollar, or any other, and you invest in assets priced in a different currency (like the British pound, Japanese yen, or Swiss franc), shifts in exchange rates will impact your actual return. Even if the investment performs well in local terms, currency fluctuations can boost or shrink your returns once converted back.Fortunately, there are effective strategies to manage this risk. Below are three simple approaches retail investors can use—along with a deeper look into how currency-hedged ETFs actually work.
1. Use Currency-Hedged ETFs
Best for: Investors who prefer a hands-off approach
Many ETF providers offer currency-hedged versions of their funds. These are designed to deliver the performance of the underlying investments while neutralizing the impact of currency movements relative to your base currency.
How does this work in practice?
Fund providers use rolling forward contracts—agreements to exchange currencies at a set rate on a future date. Each month (or sometimes weekly), the ETF manager enters into new contracts that match the value of the underlying portfolio. If the foreign currency weakens, gains from the forward contract offset the loss. If the currency strengthens, the gain in value is canceled out—but your exposure remains aligned with the core asset, not the currency.
This type of hedging is mechanical and systematic, often with little to no day-to-day impact for the investor. You just hold the fund as you would any normal ETF.
Examples for euro-based investors:
- iShares MSCI Japan EUR Hedged UCITS ETF
- Xtrackers FTSE 100 EUR Hedged UCITS ETF
How to do it:
- Log into your brokerage account
- Search for the hedged version of the fund (look for your currency and the word “hedged” in the name)
- Review the factsheet to confirm hedging frequency and method
- Buy as you would with any ETF
This approach works well when your goal is to track the equity or bond performance of a specific market, without letting currency fluctuations interfere.
2. Build a Natural Hedge Through Portfolio Diversification
Best for: Long-term investors with global exposure
A natural hedge uses the principle of balance. By holding assets in different currencies and regions, you avoid the risk of being overly exposed to just one. If one currency drops, gains in others may cushion the impact.
For example, an investor who holds:
- US stocks (USD exposure)
- Eurozone real estate (EUR exposure)
- UK dividend stocks (GBP exposure)
- A global bond ETF (mixed currency exposure)
…is unlikely to suffer major damage from a single currency movement.
How to do it:
- Analyze your portfolio by currency exposure
- Identify concentration risks
- Add international exposure gradually across geographies
- Rebalance once or twice a year
This approach relies on long-term alignment and reduces the need for ongoing management or financial products.
3. Use Forward Currency Contracts (with Help)
Best for: Larger portfolios or investors working with private banks or advisors
Forward contracts allow you to lock in a specific exchange rate for a future transaction. These are useful if you expect to sell an asset or receive dividends and want to fix the future cash flow in your local currency.
Banks or asset managers typically manage this process. For example, an investor planning to repatriate £100,000 from a UK investment next year might agree to exchange it at a fixed rate today, protecting against adverse currency moves.
How to do it:
- Contact your advisor or bank
- Ask about currency hedging using forwards
- Match contract dates with your expected income or exits
Final Thoughts
Global investing introduces currency risk, but this doesn’t need to be a source of stress. Whether you prefer the simplicity of a hedged ETF or the elegance of long-term portfolio balance, you have the tools to control your exposure. Choose the method that fits your strategy and move forward with confidence.
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