Investments overseas via managed funds or ETFs can expose investors to potential adverse currency movements, which impact performance in local currency terms. That’s why many product providers offer the option of mitigating this risk via a ‘hedged’ currency class of the underlying investment.

A common way to hedge currency movements is via forward contracts, which merely reflect the spot exchange rate, adjusted for the difference in interest rates between the two countries. Investors in the country where interest rates are highest, benefit from positive interest rate ‘carry’ on the currency hedge – i.e. it boosts the returns of the managed fund or ETF in AUD terms. This has been the case for Australians investing in the US in recent years, as you can see below.

Pros & cons of yield differentials and hedging costs

Source: QIC

For the first time in about 15 years, Australian interest rates are now below US rates. This means that domestic investors with exposure to the US face a financial net cost, as opposed to a net benefit, when considering whether to manage their currency exposure by investing in the hedged currency class of a managed fund or ETF.

If you would like more information please call 1300 ELSTON or email info@elston.com.au and an adviser will be in touch.