As currency hedging strategies gain popularity, ETF providers broadly agree they offer clear benefits in a weaker US dollar environment.
In its latest market analysis, Global X noted that while most Australian ETF investors have traditionally favoured unhedged currency ETFs for global exposure, its counterpart has grown significantly more popular over the past year.
According to the firm, before 2025, currency-hedged ETFs typically took up around a 10 to 15 per cent share of global equity ETF allocations. However, as investors began to place greater emphasis on managing currency risk, that share has now grown to around 20 per cent.
Two currency-hedged ETFs from Vanguard were among the top 10 inflows for 2025, according to Betashares, with the Vanguard Global Aggregate Bond Index (Hedged) ETF gaining $1.6 billion and Vanguard MSCI Index International Shares (Hedged) ETF gaining $1.4 billion.
Amid US dollar weakness which has seen the Australian dollar post its strongest performance against the USD in five years, Global X suggested there is a particularly compelling case for the tactical use of such strategies in 2026.
“In this environment, investors may be more inclined to consider currency hedging to help manage foreign exchange risk,” the firm stated.
It added that with a growing number of ETFs now offering currency-hedged counterparts, investors are paying increasing attention to this space.
Speaking to InvestorDaily, Betashares investment strategist, Tom Wickenden agreed that currency-hedged ETFs have recently seen strong growth due to more options and heightened awareness of currency impacts.
Wickenden noted that the trend goes back to 2023. Since then, over 20 per cent of flows into the firm’s global ETFs have targeted hedged options, surpassing the long-term average. Demand for the strategy has generally tracked the Australian dollar’s movement within a narrow range.
However, he acknowledged that adoption currently remains uneven. This is echoed in the fact that while two Vanguard currency- hedged funds saw the highest inflows, the Magellan Infrastructure (Currency Hedged) (Managed Fund) lost $154 million and the Global X US Treasury Bond (Currency Hedged) ETF lost $109 million.
“Some long-term investors have taken the view that exchange rates will average out over time and won’t materially impact returns – so they default to unhedged,” Wickenden said.
Previously, iShares ETF specialist Tamara Haban-Beer Stats highlighted a notable rise in investors opting for currency hedged ETFs, noting that the iShares S&P 500 (AUD Hedged) ETF (IHVV) attracted around $665 million in flows to 1 December 2025 – roughly triple the previous year’s total.
It was one of three currency-hedged products to rank among iShares’ top funds by inflows for the year, alongside the iShares Core FTSE Global Infrastructure (AUD Hedged) and the Core Global Aggregate Bond ESG (AUD Hedged).
Does popularity equal performance?
While the strategy’s popularity has clearly grown, there is also evidence to suggest that hedged approaches can enhance performance.
According to BlackRock, over the six months to October 2025, IHVV outperformed its unhedged counterpart by about 2 per cent, while the iShares Global 100 (AUD Hedged) ETF (IHOO) beat its unhedged equivalent by roughly 3 per cent.
Meanwhile, the top performer for 2025 – Betashares Global Gold Miners Currency Hedged ETF – was a hedged option.
At the same time, in a separate comment on the back of strong inflows into the iShares Japan ETF (IJP), BlackRock noted that there are times when strategic unhedged exposure can generate higher gains for investors.
“As an unhedged exposure, returns in IJP can fluctuate with movements in the Japanese yen.
“As the Bank of Japan potentially resumes its rate hike path in 2026, this may work to investors’ benefit versus currency hedged ETFs, as we may see the yen appreciate when interest rates rise,” the firm stated.
As previously reported by InvestorDaily’s sister publication, Money Management, hedging is also not a cure-all and can carry potential tax implications for investors.
“If you have a fixed international exposure, and your entire exposure is unhedged, and you want to introduce some hedging into your portfolio, if you’ve got unrealised gains on the assets that you’re going to need to sell down to make space for a hedge position, then that’s a capital gains tax (CGT) event,” financial adviser Bryn Evans from Integro Wealth Management told the publication at the time.
However, Wickenden concluded that while currency hedging can boost returns, its primary purpose is to dampen currency volatility.
“A percentage increase in the Australian dollar against the US dollar is a percentage loss to unhedged investor returns. For example, if the Australian dollar mean reverted to its longer term 80c average from its current levels it would diminish ~20 per cent of unhedged investors returns,” he explained.
Overall, Wickenden said Betashares also believes investors should consider tactically using currency-hedged ETFs this year, particularly given its house view that the US dollar “will weaken further” in 2026.
