Hedged or Unhedged?

[Alchemisst]

Just wondering what the best option is, as there is MSCI Index International Shares (Hedged) ETF (VGAD) and Vanguard MSCI Index International Shares ETF (VGS) as well as Vanguard US Total Market Shares Index ETF (VTS) and Vanguard All-World ex-U.S. Shares Index ETF (VEU) combination.

The problem is they all expose you to currency risk in some way, initially my understanding was that hedged meant you would get the real returns and not be affected by currency. Does this option even exist? What is the best combination for Australian investors?

[jaysee]

Funnily, I'm the opposite of you, and actually wishing my current holding (Vanguard High Growth Index Funds) was not hedged.

Based on evidence from Scott Cederburg (see this interview @ 24:00) currency difference actually improve diversification and returns, e.g. during inflationary periods, currency changes in your home currency in response help to offset the effects of local inflation, so that you're better off having the foreign stocks in foreign currencies.

[Alchemisst]

Well I'm basically saying the same thing, hedged has underperformed, I'm just wondering if it's worth hedging at all.

[daverobev]

For stocks you (=most people, not you specifically) want unhedged. You're looking for volatility.

For bonds most people want to be investing in them in their own currency/the one you're looking to use in retirement.

[habanero]

If you buy a currency-hedged fund (regardless of bonds or equities) you somewhat simplified pay the foreigin interest rate and recieve the domestic rate. So if your domestic interest rate is lower than the foreign (mostly USD in this case) you have a performance drag everything else being equal. The FX hedge the fund has in place has a positive or negative carry which doesnt really show up in the day-to-day fluctuations but are visible over time.

As a departure point I'd say you want (mostly) unhegded equity exposure and (mostly) hedged bond exposure.

Due to the US-heavy global indices and the general strengthening of the USD vs most currencies, hedged funds has underperformed measured in the domestic currency of a non-US-investor.

[lost and found]

I always go with Hedged when there is the option. The reason being my future costs/liabilities will be in the local currency.  Not sure if that is the right thing to do though - but made sense to me at the time.

[noblesavage]

Agree with the Youtube link about the horizon being the key factor. For me, I'm happy un-hedged as horizon of investment is 20-40 years. If you horizon will see you selling significant portion soonish, I guess you could consider hedged. It still doesn't make sense to me because surely there is some amount of friction (i.e. cost) to hedging the investment versus the frictionless method of buying raw (unhedged) shares.

[Alchemisst]

Agree with the Youtube link about the horizon being the key factor. For me, I'm happy un-hedged as horizon of investment is 20-40 years. If you horizon will see you selling significant portion soonish, I guess you could consider hedged. It still doesn't make sense to me because surely there is some amount of friction (i.e. cost) to hedging the investment versus the frictionless method of buying raw (unhedged) shares.

I have heard this also, but i.dont really understand it? Won't currency still matter in 30+ years? Or is it because the cost of hedging will outweigh any currency loss?