Hedged vs Unhedged ETFs: The Best Option in Every Category

When you buy an international ETF, you are converting your AUD into foreign currencies (mostly USD). If the AUD weakens after you invest, your foreign assets are worth more when converted back to AUD — a free tailwind. If the AUD strengthens, those assets are worth less in AUD terms — a headwind. Hedged ETFs remove this currency effect entirely. Unhedged ETFs leave it in.

Over the past 15 years, the AUD has been in a structural decline — falling from parity with the USD (US$1.03 in 2011) to as low as US$0.62 in late 2024. This has been an enormous tailwind for unhedged investors. Over 5 years, unhedged has beaten hedged in 8 of 9 ETF categories by an average of 24 percentage points.

But the cycle may be turning. The AUD has recovered to US$0.70 in early 2026, driven by a commodity supercycle (gold, copper, uranium, energy all surging) and a narrowing interest rate differential with the US. If the AUD continues to strengthen, unhedged investors face a headwind for the first time in over a decade.

This is the most comprehensive hedged vs unhedged comparison published for Australian-listed ETFs. We cover every pair across every category, show the performance data, and give you the framework to decide.

For the full list of every hedged ETF on the ASX, see our hedged currency ETFs page. For a deeper dive into when to use each and the hidden costs, read our hedged vs unhedged guide.

No fund manager wrote this article. No issuer is paying for placement. Just data.

The 5-Year Picture: Unhedged Dominated

Over 5 years to March 2026, unhedged ETFs have beaten their hedged equivalents in almost every category. The gaps are substantial.

Unhedged won in 8 of 9 pairs. The average gap was +24 percentage points in favour of unhedged.

The only exception was Healthcare, where the hedged version (DRUG) beat the unhedged (HLTH) by 12.8%. This is because healthcare stocks themselves underperformed broadly, and the currency tailwind was not enough to overcome the difference in underlying index construction between the two funds.

Why unhedged won

The explanation is simple: the Australian dollar fell from approximately US$0.75 in early 2021 to as low as US$0.62 in late 2024. When the AUD falls, your US-dollar-denominated investments become worth more in Australian dollar terms — a free tailwind that hedged ETFs eliminate by design.

Over 5 years, this currency movement added approximately 20-40 percentage points of return to unhedged international ETFs. That is not a small rounding error. It is the difference between a good return and a great one.

The Last 12 Months: Hedged Has Flipped the Script

The last 12 months tell a completely different story. The AUD has recovered from its lows, rising from around US$0.63 in late 2024 to approximately US$0.70 by early 2026. This AUD strength has been a headwind for unhedged ETFs.

Hedged won in 15 of 15 pairs over the last 12 months. The average gap was 8.5 percentage points in favour of hedged.

This is entirely a function of the AUD recovering. When the AUD rises, it eats into unhedged international returns. Hedged ETFs are immune to this.

The Best Option in Each Category

Over 5 years, the data strongly favours unhedged for most categories. But the best choice depends on your time horizon and your view on the Australian dollar.

Every Hedged/Unhedged Pair on the ASX (Equity Categories)

Themes, Sectors & Commodities

Active Fund Manager Pairs

Some active managers offer both hedged and unhedged versions of the same fund. This gives you a direct comparison of the currency impact on identical stock-picking.

The L1 Capital pair is particularly instructive: same fund manager, same stocks, same timing. The only difference is currency. L1IF (unhedged) lost 4.6% while L1HI (hedged) gained 4.3% — a 8.9 percentage point gap, entirely due to the AUD strengthening over the period.

For the full list of every hedged ETF available on the ASX, visit our hedged currency ETFs page.

Why the AUD Matters So Much

The performance gap between hedged and unhedged is almost entirely driven by movements in the AUD/USD exchange rate. Because you are buying international assets with Australian dollars, every move in the exchange rate directly affects your return.

40 Years of AUD History: The Economic Context

The AUD was floated by Treasurer Paul Keating in December 1983, ending decades of government-managed exchange rates. Since then, the currency has been driven by commodity cycles, interest rate differentials, and global risk appetite.

The 1980s: Post-Float Crash. When the AUD was floated, it was trading at around US$0.90. It immediately fell as markets priced in Australia's current account deficit and high inflation. Treasurer Keating's "Banana Republic" warning in 1986 saw the AUD crash to US$0.67. Interest rates were hiked aggressively — the cash rate hit 18% — as the RBA fought to stabilise the currency and contain inflation. For international investors, the 1980s AUD was a one-way bet downward.

The 1990s: Recession, Recovery, and the Asian Crisis. The "recession we had to have" (1990-91) initially weakened the AUD further. But the subsequent reforms — floating the dollar, reducing tariffs, deregulating the financial system, compulsory superannuation — laid the foundation for Australia's 30-year growth streak. The AUD recovered to US$0.78 by 1996 before the Asian Financial Crisis (1997-98) hammered it back down to US$0.63. Australia's commodity exports to Asia were hit hard, and the AUD became a proxy for Asian growth sentiment.

The 2000s: The Commodity Supercycle. China's industrialisation created insatiable demand for iron ore, coal, copper, and LNG — all things Australia exports in enormous quantities. The AUD surged from its all-time low of US$0.48 in 2001 to above parity (US$1.03) by 2011. This was the last time hedged ETFs consistently outperformed unhedged — because the rising AUD was a headwind for unhedged international investments.

2011-2025: The Long Decline. As the mining boom ended, commodity prices fell, and the US Federal Reserve embarked on aggressive rate hikes, the AUD entered a structural decline. From parity in 2011, it fell to US$0.75 by 2015, US$0.69 by 2020, and US$0.645 by late 2024. This 15-year decline has been the defining tailwind for unhedged investors — every year, your US-denominated assets were worth more in AUD terms simply because the currency was falling.

2025-2026: The Turning Point? The AUD has recovered from US$0.645 to US$0.70 in early 2026. Commodity prices are surging again (gold, copper, uranium, energy), interest rate differentials are narrowing as the Fed cuts while the RBA holds, and the USD appears to be weakening. The parallels to 2001-2003 — the start of the last commodity supercycle — are hard to ignore.

Key AUD/USD milestones

The 5-year period captured a massive AUD decline from 0.77 to as low as 0.62 — a 20% fall that translated directly into 20%+ outperformance for unhedged ETFs.

The last 12 months captured an AUD recovery from ~0.63 to ~0.70 — about 10% appreciation that has hurt unhedged returns by approximately 8-10%.

Has the Cycle Changed? The Case for a Stronger AUD

For 15 years, the AUD has been in a structural decline. From parity with the USD in 2011, it fell to as low as US$0.62 in late 2024. This trend has made unhedged the obvious winner for an entire generation of Australian ETF investors.

But there are reasons to believe this trend may be reversing:

1. The commodity supercycle is back. Gold, copper, uranium, oil, and agricultural commodities are all surging. Australia is one of the world's largest commodity exporters. When commodity prices rise, demand for AUD typically rises with it. This was exactly what drove the AUD from US$0.52 in 2001 to parity in 2011 — a decade-long commodity boom.

2. Interest rate differentials are narrowing. The US Federal Reserve has been cutting rates while the RBA has held relatively steady. When Australian rates are higher than US rates, the AUD becomes more attractive to global investors seeking yield. This carry trade effect has historically supported the AUD.

3. The AUD is historically cheap. At US$0.70, the AUD is well below its 25-year average of approximately US$0.75. If it simply mean-reverts, that is a 7% headwind for unhedged investors — roughly equivalent to an entire year of equity returns.

4. The USD may have peaked. The strong USD cycle that dominated 2022-2024 was driven by aggressive Fed hikes. As the Fed reverses course, USD strength may unwind. A weaker USD means a stronger AUD.

None of this means the AUD will definitely rise. But the risk/reward has shifted. After 15 years of a falling AUD tailwind, the probability of that tailwind continuing is lower than at any point since 2011.

For more on how the current cycle is shifting and what it means for your portfolio, see our ETF concentration problem analysis.

How to Decide: Hedged or Unhedged?

There is no universally correct answer. But here is a practical framework.

Choose Unhedged If:

• Your time horizon is 10+ years (currency movements tend to wash out over very long periods)

• You believe the AUD will stay weak or fall further

• You want natural diversification — when the Australian economy struggles, the AUD typically falls, which boosts your unhedged international returns (a natural hedge for your domestic income)

• You want lower fees (unhedged ETFs are typically 0.03% cheaper)

Choose Hedged If:

• You are drawing income from your portfolio and need predictable AUD returns

• You believe the AUD will rise significantly from current levels (~US$0.70)

• You have a shorter time horizon (1-3 years) where currency can dominate returns

• You want to isolate the underlying equity return without currency noise

The Common Approach: Mix Both

Many investors hold a blend — typically 70% unhedged / 30% hedged, or 50/50. This provides partial currency protection without fully giving up the potential tailwind from a falling AUD.

For more on how to structure your international allocation, see our IVV vs VGS vs VTS comparison and our portfolio design guide.

The Hidden Cost of Hedging

Hedging is not free. The cost of maintaining a currency hedge includes:

1. Higher MER — Hedged ETFs typically cost 0.03% more than their unhedged equivalents (e.g. VGS 0.18% vs VGAD 0.21%)

2. Interest rate differential — When Australian interest rates are higher than US rates, the cost of hedging increases. This has been a minor factor recently but can be material in some environments

3. Tracking error — Hedged ETFs can experience small tracking errors from the rolling of currency forward contracts

Over long periods, these costs compound. On a $100,000 portfolio over 20 years, the 0.03% MER difference alone costs approximately $3,000-4,000 in lost returns. The interest rate differential can add more.

For a deeper analysis of hedging costs, see our hedged vs unhedged guide and our ETF fee analysis.

The Bottom Line

The data does not tell you what will happen next. It tells you what has happened — and the pattern is clear: the AUD's direction determines the winner.

If you are a long-term investor who does not need to time currency movements, unhedged is the simpler, cheaper, and historically better-performing option over full market cycles.

If you want certainty about your AUD returns — particularly in retirement or when drawing income — hedged provides that certainty at a small cost.

The worst option is not choosing at all and assuming it does not matter. Over 5 years, the gap between hedged and unhedged on the S&P 500 alone was nearly 40 percentage points. That is not noise. That is a material portfolio decision.

Browse every hedged ETF on the ASX at our hedged currency ETFs page.

Data sourced from CBOE Australia (performance to 31 March 2026), Reserve Bank of Australia (exchange rates), and ReviewETF.

Compare every hedged and unhedged ETF at ReviewETF.com.au — fees, performance, and holdings for every ASX-listed ETF.

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