Hedged ETF beats unhedged by 3% over decade

A currency-hedged international stock ETF has beaten its unhedged twin by 3% a year for the past decade, new data shows. The iShares Currency Hedged MSCI EAFE ETF (HEFA) locked in higher returns than the plain iShares MSCI EAFE ETF (EFA) by removing swings in the dollar, euro, yen and pound from its performance.

The gap comes down to currency risk. A strong dollar punches holes in unhedged funds because foreign gains shrink when converted back to greenbacks. Over the last ten years the dollar generally strengthened, making HEFA’s hedging pay off. The hedged fund also cut its volatility by about 10%, smoothing out bumps along the way.

In hard numbers, a $10,000 investment in HEFA at the start of 2014 would have grown to roughly $32,700. The same money in EFA would have reached about $25,000. The $7,700 difference is almost entirely the work of currency moves. For example, Japanese stocks might have climbed 8% in yen terms, but if the yen slid 10% versus the dollar an unhedged investor would have lost 2%.

Investors now face a choice. Hedging works best when the dollar keeps rising or when global markets swing wildly. If the dollar weakens or stays flat, unhedged funds can catch up. Given the past decade’s dollar strength, the hedged route has looked like the safer bet, but the future may shift that balance.