Currency risk in ETFs: do you need a hedged share class?

A Greek or German investor who buys a global ETF in euros has bought a portfolio priced mostly in other currencies. When the dollar falls against the euro, the euro value of the fund falls with it, even on a day the shares themselves do not move. The euro price on the screen is the dollar value translated at the day's rate.

A currency-hedged share class exists to take that swing out. It costs something every year, and the size of the cost is set by interest rates and not by the fund provider.

This guide measures the exposure, explains how the hedge works and what it costs at today's rates, and then sets out when the trade makes sense. The case for it is weak for shares held a long time and strong for bonds.

A fund has several currencies attached to it, and the UCITS guide sets out what each one does. One fund shows the problem in full. The share class of the iShares Core MSCI World UCITS ETF with ISIN IE00B4L5Y983 is denominated in US dollars. On Xetra it trades as EUNL in euros, in London as SWDA in sterling, and on Euronext Amsterdam as IWDA in euros again.

Three tickers and three prices, with one portfolio behind all of them. The fund's own key investor information document puts it plainly. The shares may be traded in currencies other than their base currency, and their performance may be affected by this currency difference.

Buying the euro line saves you a currency conversion at your broker. It leaves the fund's holdings exactly as they were.

MSCI's factsheet for 30 September 2026 puts the United States at 72,94% of the MSCI World. Japan is 5,91%, the United Kingdom 3,41% and Canada 3,29%. Those four countries alone come to 85,55% of the index, and each has its own currency.

The euro part is smaller than many investors guess. France, the largest euro-area country in the index, is 2,24%. The factsheet groups everything after the top five under “Other”, so the exact euro share cannot be read off it, but the arithmetic caps it. With 85,55% in four other currencies, the euro share is at most 14,45%, and in practice lower, since Switzerland, Australia and the Nordic markets sit in that remainder too.

Here is what that means in money. Suppose the shares in the fund do not move in dollars over a year and the dollar falls 10% against the euro. The dollar part of a €10.000 holding is worth about €7.294 at the old rate and about €6.565 at the new one. The holding loses roughly €730, or 7,3%, from the exchange rate alone. A 10% rise in the dollar would add the same amount.

The question a hedge answers is whether you want that second source of movement on top of the movement of the shares.

A hedged share class holds the same portfolio as the rest of the fund. On top of it, the manager enters currency forward contracts for that class alone. A forward fixes today the rate at which one currency will be exchanged for another on a later date. A euro-hedged class of a dollar fund agrees to sell dollars for euros a month ahead, in roughly the amount of dollars the class owns. If the dollar then falls, the shares are worth less in euros and the forward gains about as much, so the two largely cancel.

The price of a forward is set by the two currencies' interest rates. A bank that agrees to buy your dollars a month from now can hold them in the meantime at the dollar rate, and it prices the forward so that the difference between the two rates is passed on. When dollar rates are above euro rates, a euro investor selling dollars forward receives fewer euros than today's exchange rate would give. The shortfall over a year is close to the difference between the two rates.

You can look the rates up. The Federal Reserve's target range for the federal funds rate has been 3,75–4,00% since 17 September 2026. The ECB's deposit facility rate has been 2,50% since 16 September 2026. The difference is 1,25 to 1,5 percentage points. At those rates, hedging a dollar position back into euros costs roughly that much a year, or €125 to €150 on every €10.000 hedged.

Treat that as an approximation. Forwards are priced off market rates for the same term, which sit near the policy rates without matching them, and the small remaining deviation (the cross-currency basis) moves on its own. The cost also moves with the rates. If the two central banks converge it shrinks towards zero, and if euro rates rose above dollar rates the same mechanism would pay the investor instead. Today's figure describes this year only.

The share class charges a fee as well. The iShares factsheets for September 2026 give a TER of 0,20% for the dollar class of the Core MSCI World fund and 0,30% for its EUR-hedged distributing class. The two classes also differ in what they do with dividends, so where a provider offers both versions of a hedged class, compare like with like. The rate gap appears in no fee table. The forward price takes it, and it shows up only in the return.

One trap is easy to fall into. The iShares factsheet for the EUR-hedged class prints its calendar returns beside the MSCI World Index (Net) in dollars, which is the unhedged index. For 2025 it shows 16,46% for the share class and 21,09% for the benchmark.

That 4,63-point gap is no tracking difference. It mixes the year's interest rate gap, the leak from a hedge reset only monthly, the fee, and the fact that one figure is in euros and the other in dollars, and the factsheet does not split them. To judge a hedged class, compare it with the euro-hedged version of its index where the provider publishes one, and measure the tracking difference over full years.

The table ranks no fund. It sets out which way the mechanism points in each situation and gives the reason, so you can test it against your own.

All four are in the fund's own documents or on the two central banks' websites.