Hedged vs unhedged ETFs: what every Australian investor needs to know
VGS or VGAD? NDQ or HNDQ? The hedging decision affects your returns and your risk — here's how to think about it.
Tip
What is currency hedging?
When you buy a global ETF, you're not just buying shares — you're also implicitly holding foreign currencies. If you buy Vanguard's VGS (which holds US, European, Japanese, and other international shares), roughly 70% of the underlying holdings are priced in US dollars.
This means your AUD returns depend on two things: how the shares perform, and how AUD moves against those currencies.
Simple example
You invest $10,000 AUD in VGS when 1 AUD = 0.65 USD. The US market rises 10%, so your holding is now worth $10,000 × 1.10 = $11,000 in USD terms. But if the AUD has risen to 0.72 USD, you need more USD to get the same AUD — so your return in AUD terms is less than 10%.
A hedged fund would have used forward contracts to lock the exchange rate, so you'd receive the full ~10% regardless of what AUD did.
Popular hedged vs unhedged pairs on ASX
| Unhedged | Hedged | Market | Unhedged MER | Hedged MER |
|---|---|---|---|---|
| VGS | VGAD | Developed world (MSCI World) | 0.18% | 0.21% |
| NDQ | HNDQ | Nasdaq 100 | 0.22% | 0.24% |
| IVV | IHVV | S&P 500 | 0.03% | 0.10% |
| IOO | IHOO | Global 100 | 0.40% | 0.43% |
MER data approximate as at May 2026. Verify on provider websites before investing.
Why unhedged usually wins long-term
There are three reasons most long-term Australian investors should default to unhedged:
Currency effects cancel out over time
Short-term exchange rate moves are noisy and unpredictable. Over 10–20 years, they tend to mean-revert. A study of Australian investors from 1990–2020 found that currency hedging added almost no long-term return advantage — the costs outweighed the benefits.
The AUD is a 'risk-on' currency (a natural hedge)
AUD tends to weaken during global downturns (when your international ETF also falls). This partially cushions falls in AUD terms. Conversely, when markets recover and your ETF rises, AUD often rises too, reducing your gain slightly. Over a full cycle, this reduces volatility of an unhedged position relative to what you might expect.
Hedging has a real cost
Beyond the higher MER, the fund manager must continuously roll forward currency contracts. When Australian interest rates are below US rates (as is often the case), this 'carry cost' is a drag — sometimes 0.5–1.0% p.a. on top of the MER difference.
When hedging makes sense
There are valid reasons to choose hedged ETFs in some circumstances:
- Short investment horizon — If you plan to use the money in 1–3 years, short-term currency volatility matters more and hedging provides more predictable outcomes.
- Income-focused investors — If you're drawing down distributions regularly (e.g. in retirement), hedging gives more predictable distribution amounts in AUD.
- You have a strong view on AUD direction — If you believe AUD will strengthen significantly, hedged returns will be relatively higher (you won't lose on currency conversion). This is tactical and not recommended without strong conviction.
Note
Frequently asked questions
What does currency hedging mean in an ETF?
When you buy an international ETF, you're indirectly holding foreign currencies (USD, EUR, JPY etc.) in addition to the underlying shares. If the AUD strengthens against those currencies, your returns in AUD terms are reduced — even if the shares performed well. A hedged ETF uses financial contracts to remove (or reduce) this currency effect, so your returns track the underlying share performance more closely.
Should I buy VGS or VGAD?
For most long-term Australian investors (10+ year horizon), VGS (unhedged) is the better choice. Currency hedging adds a cost of ~0.15–0.3% p.a. and research shows that over long periods, currency fluctuations largely cancel out. VGAD makes sense if you're within 2–3 years of needing the money and want to reduce short-term AUD/USD volatility.
Does hedging cost more?
Yes. Hedging adds cost in two ways: a higher MER (VGAD charges 0.21% vs VGS's 0.18%) and an implicit 'roll cost' from renewing the currency hedging contracts regularly. When the AUD interest rate is lower than the USD rate, hedging is expensive for Australian investors. When AUD rates are higher, hedging can actually be cheaper.
Is the AUD a 'risk-on' currency?
Yes, broadly. The AUD tends to fall during global market downturns (risk-off) and rise when markets are strong (risk-on). This means that when your unhedged international ETF falls in value due to a market crash, the AUD also typically weakens — partially offsetting your loss when measured in AUD. This 'natural hedge' is one reason unhedged international exposure can be less risky in practice than it sounds.
What's the difference between NDQ and HNDQ?
NDQ is BetaShares' Nasdaq 100 ETF — unhedged, so returns in AUD vary with AUD/USD movements. HNDQ is the AUD-hedged version of the same fund. HNDQ charges a slightly higher fee and provides returns that track the Nasdaq 100 in USD terms more closely. Because the Nasdaq 100 is volatile already, most long-term investors choose NDQ and accept the currency exposure.
Can I hold both hedged and unhedged ETFs?
Yes, and some investors do — holding, say, 70% unhedged and 30% hedged international exposure. This reduces (but doesn't eliminate) currency volatility without paying for full hedging. However, for most retail investors the added complexity isn't worth it. Picking one and sticking with it is simpler and just as effective over time.