A currency-hedged ETF is an ETF designed to ‘hedge’ currency risk. Generally speaking, it reduces the risk of owning foreign currency-denominated securities by “hedging” through entering forward foreign exchange contracts (or similar instruments) with a third party, enabling the ETF to set an exchange rate at a certain price for a certain period of time.

Typically, we would expect an ETF that has a currency hedge to perform in a way that generally equates to the performance of its benchmark as reflected in local currency performance – less fees and costs associated with the ETF and its hedging strategy.  This type of ETF is ideal for investors who are looking to reduce currency risk in their portfolios.  It’s important to understand that once an ETF strategy is currency-hedged it will reduce most of the downside risk of having foreign currency exposure, but also, any potential capital appreciation from having exposure to that foreign currency as well.

Since there is a cost to owning currency-forwards, we would generally expect that these ETFs have a higher cost associated with them than a non-currency hedged strategy; however, that cost might be worth it, particularly if the value of the currency the ETF was purchased in (usually Canadian dollars) declines relative to the value that the foreign currency is denominated in (usually U.S. dollars).