Most U.S. investors buy an international ETF for one reason: diversification. They want to spread their money beyond the S&P 500, own companies in Europe, Japan and emerging markets, and stop relying on a single country for every part of their equity return.
That logic is sound. But an unhedged international fund contains another source of movement that most brokerage screens do not break out separately.
When you own a broad international ETF such as VXUS or IXUS, you own foreign stocks whose prices are measured in euros, yen, pounds, rupees and other currencies. The fund reports its value to you in dollars. Your result therefore depends on both the performance of the underlying markets and the exchange rates used to translate those values back into dollars.
Those two forces can move together or pull in opposite directions.
One ticker, two sources of return
Suppose a foreign stock index rises 10% in its local currency. That does not automatically give a U.S. investor a 10% return.
If the foreign currency falls 5% against the dollar during the same period, the investor’s dollar return is approximately 4.5%.
Dollar return = (1 + local-market return) × (1 + foreign-currency return against the dollar) − 1
In this example:
1.10 × 0.95 − 1 = 4.5%
The calculation also works in the other direction. If the market rises and its currency strengthens against the dollar, currency translation adds to the U.S. investor’s return.
This is why currency should not be described as a permanent fee or tax. It is a two-sided exposure. It can hurt for years, then reverse and help.
How a rising foreign market can still disappoint
The decade beginning in 2014 provides a clean example.
Avantis Investors compared the MSCI World ex USA and MSCI Emerging Markets indexes in local currencies and U.S. dollars from January 1, 2014, through February 29, 2024.
Over that period:
- MSCI World ex USA gained 110.59% in local-currency terms
- The same index returned 64.00% in U.S. dollars
- MSCI Emerging Markets gained 75.06% in local currencies
- The same emerging-markets index returned 34.88% in dollars
The underlying local-currency indexes rose substantially. U.S. investors also made money, but dollar strength reduced the cumulative return they received after translation.
It would be misleading to say the U.S. investor kept only 64% of the original money. The investor earned a cumulative 64.00% return in dollars. The point is that the result was far smaller than the 110.59% local-currency return shown by the same developed-market index.
That gap did not come from choosing a different time period or a different collection of countries. It came from measuring foreign assets through a stronger dollar.
The direction is not permanent. Avantis also examined rolling three-year periods beginning in 2000 and found many stretches when currency translation helped U.S. investors rather than hurt them. A decade of dollar strength can feel like a fixed rule right before the rule changes.
Hedged and unhedged funds are not always direct twins
An unhedged international ETF allows exchange-rate movements to flow into its dollar return.
A currency-hedged ETF typically uses forward contracts to offset much of that movement. If the euro, yen or another foreign currency weakens against the dollar, gains on the hedge can offset part of the translation loss. If those currencies strengthen, the same hedge can surrender part of the benefit.
The hedge is not free, but its cost cannot be reduced to the expense ratio alone. The outcome also reflects interest-rate differences between currencies, forward pricing, trading costs, contract rollovers and tracking error. Depending on those conditions, the hedge can create either a benefit or a drag during a particular period.
There is another trap in comparing ETF tickers. A hedged developed-market fund is not necessarily the hedged version of a broad unhedged ex-U.S. fund.
VXUS and IXUS hold developed and emerging markets. Many popular hedged funds track narrower developed-market indexes. If two funds own different countries and companies, their return difference cannot be attributed entirely to the currency hedge.
A proper comparison requires the same underlying market exposure on both sides. Otherwise, the investor is changing the stocks and the currency policy at the same time.
Before buying, read the investment objective and benchmark on the issuer’s page. The word hedged in the fund name is a useful clue, but it does not tell you whether the hedge is full, partial, dynamic or tied to a different index.
What hedging actually changes
Currency hedging is most useful when exchange-rate movement could overwhelm the return you expect from the underlying asset.
That issue is especially important for bonds. High-quality bonds usually have lower expected volatility than equities, so a large currency move can dominate the interest income and price movement the investor intended to own.
The 2026 UBS Global Investment Returns Yearbook examined real returns across 20 foreign countries from 1900 through 2025. Measuring those assets in dollars added about 5.8 percentage points to average annual equity volatility and about 5.7 points to bond volatility. The absolute currency contribution was similar, but it represented a much larger share of the total risk in bonds.
That helps explain why international bond portfolios are commonly hedged.
The equity decision is less automatic. Stocks already move enough that currency is only one part of their risk. Kenneth Froot’s research on long-horizon currency hedging also found that the short-term ability of full hedging to reduce variance did not consistently survive over periods of several years. In many of the portfolios he studied, complete hedging increased long-horizon variance.
That does not prove an unhedged fund will earn more. It shows why there is no universal rule saying a hedged equity fund is always safer or better.
Choose based on the job the money must do
Trying to switch between hedged and unhedged funds according to the latest dollar forecast turns a diversification decision into a currency-timing decision.
A better choice starts with four questions.
First, what currency will you eventually spend? A U.S. investor saving for dollar-denominated expenses may view foreign-currency volatility differently from someone planning to retire abroad.
Second, how soon might you need the money? A short horizon leaves less time to absorb a large currency move.
Third, are you investing in stocks or bonds? Currency exposure is more likely to dominate a low-volatility bond allocation.
Fourth, do you want foreign-currency exposure as part of the diversification? An unhedged global portfolio spreads risk across countries and currencies. A hedged portfolio keeps the foreign companies while pulling more of the currency exposure back toward the dollar.
For a detailed breakdown of how a strong dollar affects international ETFs, including the historical return gap and its effect on a contributing portfolio, see:
The bottom line
An unhedged international ETF combines foreign stocks with foreign-currency exposure. The two sources of return arrive inside one ticker, even when a brokerage account reports only the final dollar number.
A strong dollar can reduce the return a U.S. investor receives from a rising foreign market. A weak dollar can increase it. A hedge can reduce much of that exchange-rate movement, but it introduces its own implementation effects and does not guarantee a better long-term result.
The useful question is not where the dollar will trade next year. It is whether the currency exposure inside the fund matches the investor’s future spending, holding period and reason for going international in the first place.
The next time an international ETF trails its local market, look beyond the stock holdings. Part of the difference may have occurred at the exchange rate between their currency and yours.
Danny Hwang is a quant analyst and the founder of TheFinSense, https://thefinsense.io/, where he models the hidden costs that separate headline returns from what investors actually keep. His work focuses on the gap between financial intuition and what the math shows.
