Currency Hedged ETFs

Fluctuating interest rates and volatile inflation can have powerful effects on currency, and as such, for international investors with exposure to foreign exchange, currency hedging may be front of mind.

An increasingly popular question from investors has been whether one should start looking at currency hedging, especially in the context of what appears to be diverging interest rate paths between the US Federal Reserve and the Reserve Bank of Australia.

When investing internationally, investors are naturally exposed to the additional risk of currency fluctuations. Oversimplified, international investors contend with both movements in the price of their investment and the foreign exchange rate, making investment returns doubly difficult to forecast.

Consider, for example, an Australian investor who purchases a US stock which proceeds to double in value. In the case that the Australian dollar (AUD) also appreciates 100%, the investor may find that his investment outcome in AUD terms nets out to zero, making what appeared to be a successful trade, a meaningless endeavour.

Investors may want to consider tactical currency hedging when they expect significant fluctuations in exchange rates that could impact their returns. For example, if interest rates are rising in their home country but decreasing or unchanged in the country where they hold investments. In this scenario, the home currency may appreciate, making the foreign investment less valuable in home currency terms. Similarly, differences in inflation rates can also affect currency values; if inflation is higher in the country of the foreign investment, the local currency might weaken, diminishing returns.

Hence, currency hedged ETFs may be suitable for investors looking to capitalise on the potential of investing in overseas markets and assets. Currency hedged ETFs are designed to help navigate the complexities of currency fluctuations and simplify this part of the investing process.

Global X has a variety of currency hedged ETFs that cater to different investment strategies and goals, each of which adds a layer of protection against currency fluctuations.

• Global X FANG+ (Currency Hedged) ETF (FHNG) • Global X US Treasury Bond ETF (Currency Hedged) (USTB) • Global X USD High Yield Bond ETF (Currency Hedged) (USHY) • Global X USD Corporate Bond ETF (Currency Hedged) (USIG)

The performance of currency hedged ETFs vary depending on the underlying asset and index they track. Below is the performance of our currency hedged ETFs over the last 12 months.

Global X FANG+ (Currency Hedged) ETF (ASX: FHNG)

FHNG provides concentrated exposure to 10 highly traded global innovation leaders across the Information Technology, Consumer Discretionary and Communication Services sectors, hedged back to the Australian dollar.

FHNG Performance performance table - showing YTD, 1 Mo, 3 Mo - auto generated figures - no content needed here

Why Invest in FHNG FHNG can be used for targeted exposure to some of the largest global tech giants of today with the added benefit of currency hedging to reduce the impact of currency fluctuations due to investing internationally. It’s designed to be a core building block for growth-oriented exposure.

Global X US Treasury Bond ETF (Currency Hedged) (ASX: USTB)

The US Treasury Bond ETF is all about giving you access to US Treasury bonds while aiming to mitigate currency risks, and treasury bonds are often viewed as the gold standard of low-risk investments, thanks to the backing of the US government. The focus of this ETF is on bonds with short to intermediate maturities, striking a nice balance between yield and interest rate sensitivity, creating a safety net while still aiming for decent returns.

USTB Performance performance table - showing YTD, 1 Mo, 3 Mo - auto generated figures - no content needed here

Why Invest in USTB Investing in the US Treasury Bond ETF is a good choice if you are looking for stability, as Treasury bonds are about as stable as it gets, making this fund well-suited to investors who want to prioritise safety in their portfolios. Also, with the added currency hedge, you can relax knowing that you are protected from the ups and downs of the AUD/USD exchange rate.

Global X USD High Yield Bond ETF (Currency Hedged) (ASX: USHY)

The USD High Yield Bond ETF focuses on US corporate bonds that offer higher yields. You can think of this ETF as a bit of a thrill ride compared to the safety or Treasury bonds, as they have a reputation for being riskier but can also provide more attractive returns. This fund includes a diverse selection of US high-yield corporate bonds, giving you the chance to tap into higher income potential while still enjoying the benefits of currency hedging.

USHY Performance performance table - showing YTD, 1 Mo, 3 Mo - auto generated figures - no content needed here

Why Invest in USHY If you are up for bit more risk in exchange for potentially higher returns, the USD High Yield Bond ETF could be a fantastic fit. Sure, high-yield bonds can be a little more volatile, but they also offer higher coupon payments, and thanks to the currency hedging, you will not have to worry about how currency fluctuations might impact your returns.

Global X USD Corporate Bond ETF (Currency Hedged) (ASX: USIG)

The USD Corporate Bond ETF zeroes in on US investment-grade corporate bonds, which are issued by companies that have solid financial standings. While they come with a bit more risk than government bonds, they still provide a reliable option for investors looking for decent returns without taking on too much volatility.

USIG Performance performance table - showing YTD, 1 Mo, 3 Mo - auto generated figures - no content needed here

Why Invest in USIG While the USD Corporate Bond ETF does not offer the same jaw-dropping yields as high-yield bonds, investing in corporate bonds could be a suitable addition to your portfolio, as they typically yield more than Treasury bonds while remaining relatively stable. And, as always, with that currency hedging in place, you can focus on how these US companies are performing without the added headache of currency movements affecting your returns.

Currency hedged ETFs use foreign exchange (FX) forward contracts to limit the effect of currency fluctuations on the end investor’s home currency return. FX forward contracts are agreements between two parties to exchange currencies at a predetermined rate and a future point in time, regardless of the spot exchange rate at the time of exchange. This means, regardless of which direction the exchange rate moves, it will have no effect on your investment return as the exchange rate is locked in.

Currency hedging can be used on all types of ETFs including those that hold equities and bonds. At its core, the idea behind currency hedging is simple as it aims to provide the best of both worlds – access to international markets and a layer of protection against currency volatility.

Currency-hedged ETFs provide a valuable way for investors to reduce the risk of currency fluctuations on their international investments. By understanding when and why to hedge, investors can better manage their portfolios and protect their returns. Currency hedging is especially useful in times of varying interest rates and economic conditions across countries. While it is important to distinguish between short-term hedging and long-term strategies, incorporating currency hedging can lead to more predictable and potentially improved returns, making it a key part of a well-rounded investment approach.

Getting started with currency hedged ETFs from Global X is simple, and just like any other ETF, these funds are listed on the Australian Stock Exchange (ASX), so you can buy and sell them online. All you need is a brokerage account, and once you have selected the ETF ticker and read the relevant PDS and TMD, you are good to go.

Get more information on how to invest with Global X.

Here are some of the potential benefits that come from investing in a currency hedged ETF.

Reduced Currency Risk
The biggest benefit is that currency hedging helps you focus on the underlying investment returns without having to fret about fluctuations in exchange rates having an impact.

Tactical Tool
Currency hedged ETFs may be useful for those looking for a tactical tool to take a position on how the underlying asset’s performance and returns will be impacted by currency volatility.

As with all investments, currency hedged ETFs are not without risk, and while they do help manage currency risk, investors should be aware of the below considerations.

Hedging Costs
Maintaining a currency hedge can add costs that might eat into your returns, and this is particularly common during periods of low currency volatility, where the hedge may not be as necessary.

Underlying Asset Price Changes
It is important to consider the risks associated with the underlying asset a currency hedged ETF tracks. For instance, credit risk for bond ETFs or capital loss risk for equity ETFs.

Economic Risk
Currency hedged ETFs are exposed to the changes in the macroeconomic environment.