You’ve picked a low-fee provider.
You’ve chosen a diversified global index fund.
Then you hit the final hurdle:
Hedged or unhedged?
What does that even mean – and does it actually matter?
Let’s break it down.
The two moving parts
The return you experience from a global index fund depends on two things:
- What the underlying shares do
(company performance, dividends, market movements) - What happens to the exchange rate
between the New Zealand dollar and the currencies those shares are priced in
A simple way to think about this is like interpreting a blood calcium result.
You can look at the raw number and think everything looks fine – but until you correct for albumin, you don’t know what’s actually going on.
In investing, the “corrected calcium” is your return after currency movements, fees, and tax.
That’s the number that ultimately matters.
How currency hedging works
Currency hedging aims to reduce the impact of exchange-rate movements on your investment returns.
A hedged fund uses financial contracts to lock in exchange rates, so changes in the NZ dollar have less effect on what you end up with in NZD terms.
An unhedged fund doesn’t do this – currency movements flow straight through to your returns.
Here’s a concrete example.
Say you buy US shares at $10 USD, and over time they increase to $20 USD. In US-dollar terms, your investment has doubled.
But over that same period, the NZ dollar strengthens against the US dollar – meaning 1 NZD now buys more USD than before. When you convert your investment back to NZD, each USD is worth fewer NZD. This would be the equivalent of an American coming to NZ for a holiday when the NZD strengthens and now their money can’t go as far.
So despite the shares doubling in value, your return in NZD is lower than you might have expected.
If the NZD had weakened instead, the opposite would have happened – the same US-dollar gain would translate into a larger NZ-dollar return.
That’s the role currency plays.
What the evidence shows
When researchers look at currency effects over long periods (often 10+ years), a few consistent patterns emerge:
- Currency movements are unpredictable in the short term
- Over longer timeframes, their impact on returns tends to average out
- In some market downturns, unhedged foreign assets have actually provided a buffer, because the NZ dollar often weakens during periods of global stress
Hedging has costs, but many NZ providers build these into their fee structure rather than charging extra for hedged versions. Check whether your provider charges differently – if they don’t, cost isn’t a factor in this decision.
When you put this together, the evidence suggests that for long-term investors in broadly diversified global funds, currency hedging is unlikely to be a major driver of long-term outcomes.
In practice, your long-term returns will be driven far more by:
- keeping fees low
- being broadly diversified
- staying invested through market cycles
- not changing strategy in response to short-term noise
So… does it matter?
For most people investing over decades, the honest answer is: probably not very much.
Currency hedging affects how bumpy the ride feels, not where you’re likely to end up over the long term.
Whatever you do, aim for a low-cost option, commit to it, and focus your energy on the things that actually move the needle on your wealth over time.
Evidence-based investing is just one part of your overall financial picture.
If you’d like a structured, evidence-based approach to improving your financial wellbeing more broadly as a New Zealand doctor, you can learn more about my CPD-endorsed Financial Resuscitation course here:
👉 https://healthywealth.nz/financial-resuscitation/
This post is for general information and education only. It is not personalised financial advice and does not take into account your individual circumstances, objectives, or needs.