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Your return on an international stock is the combination of the stock’s performance in its local market and the change in the exchange rate between that market’s currency and the currency you use to measure your wealth. A rising foreign market can produce a disappointing result for a home-currency investor when the home currency strengthens. Conversely, a falling or flat local market can translate into a gain when the foreign currency appreciates.
Currency exposure is therefore a second source of variability layered on top of equity risk. You can leave it unhedged, hedge part of it, or hedge most or all of it, but the choice changes both the risks you accept and the costs you pay; it does not guarantee a higher return.
What an international stock return actually contains
A local-market return is measured in the currency in which the shares trade. A US investor, for example, may see a Japanese share rise in yen while the investment loses value after conversion to dollars. The investor’s result is determined by the local equity movement and the currency movement over the same measurement period.
A useful approximation is:
home-currency return = (1 + local equity return) × (1 + foreign-currency return versus the home currency) − 1
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Here, a positive foreign-currency return means the foreign currency gained value against the investor’s home currency. A negative figure means the home currency strengthened.
| Local equity return | Foreign-currency move versus home currency | Translated return | What happened |
|---|---|---|---|
| +10% | +5% | +15.5% | Both the shares and the foreign currency helped. |
| +10% | −8% | +1.2% | The shares rose, but a stronger home currency absorbed most of the gain. |
| −10% | +8% | −2.8% | The currency cushion reduced, but did not eliminate, the equity loss. |
| −10% | −8% | −17.2% | The shares and the foreign currency both moved against the investor. |
The figures in this table are illustrations calculated from the formula, not historical market observations. In a diversified international fund, the same calculation applies separately to each currency exposure before the positions are combined.
Why a strong home currency can hurt foreign stocks
Suppose a US investor owns an unhedged European fund. If the euro falls from $1.10 to $1.00 while the fund’s holdings are unchanged in euro terms, each euro buys fewer dollars. The dollar value of the position falls even though no company price changed in its local market. If the euro rises instead, conversion adds to the dollar return.
The wording “the dollar hurt international stocks” is shorthand for this translation effect from a US perspective. It is not a statement about every investor: a euro-based investor would experience the opposite effect against the dollar, and an investor whose wealth is measured in another currency would have a different result.
Currency can also alter comparisons between markets. A country with a modest local gain may outperform a country with a larger local gain after conversion if its currency appreciates more. Conversely, a strong home currency can make several foreign markets appear weak at once, even when their local indexes are positive.
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How to read an international fund’s return
Check which return series you are seeing
Index providers and fund reports commonly show a local-currency return and one or more investor-currency returns. The “USD” version, for example, includes conversion into dollars; the local version does not. A hedged version is a separate series because it uses currency contracts to reduce the effect of exchange-rate changes.
Understand the fund’s currency mix
A global ex-home-country fund may contain the euro, yen, pound, Canadian dollar, Swiss franc, emerging-market currencies and others. The portfolio’s currency result is a weighted outcome, not the movement of one headline exchange rate. Weights can change when share prices move, when the manager rebalances, or when the index changes its country composition.
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Funds calculate a net asset value at a stated time, while foreign markets and currency markets may be open at different hours. A sharp exchange-rate move after a local market closes can appear in the fund’s next valuation. This timing difference can make a daily fund return look out of step with a local index on the same calendar date without indicating a calculation error.
A worked example: why a fund can fall while its local index rises
Assume an international index rises 12% in local terms over a year. During that year, the investor’s home currency gains 10% against the index currency, which is a 10% foreign-currency loss from the investor’s perspective. The translated result is:
(1.12 × 0.90) − 1 = 0.008
The investor earns approximately 0.8% before fees and any tracking difference. A larger home-currency gain would turn the translated return negative. This is why checking only a foreign market’s local headline can give the wrong answer to the question “How did my fund perform?”
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What currency hedging changes
Hedging seeks to reduce exchange-rate exposure while keeping the underlying foreign equity investment. The manager normally uses contracts whose value moves in the opposite direction to the currency exposure. A hedge does not convert a foreign stock into a domestic stock: company prices, dividends, sector weights and local-market risks remain.
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1Clear out junk files and repair common Windows errors2Scan for outdated or missing drivers - takes under a minute3Repair Windows errors before they cause bigger problems| Exposure choice | Currency exposure left in the portfolio | Potential benefit | Trade-off |
|---|---|---|---|
| Unhedged | Most or all of the currency movement | Currency appreciation can add to returns; no derivative program is needed. | Home-currency strengthening can reduce returns and increase volatility. |
| Partially hedged | A specified fraction, such as 50%, subject to the fund’s mandate | Reduces some currency variability while retaining some potential currency diversification. | Results depend on the chosen ratio, rebalancing and implementation costs. |
| Fully hedged | Most of the targeted currency exposure | Makes returns more closely reflect local equity performance in the investor’s currency. | It can miss gains from a favorable currency move and still has costs, basis risk and residual exposure. |
Common instruments
- Forward contracts: agreements to exchange currencies at a future date and an agreed rate. Funds typically roll them as they approach maturity.
- Options: provide the right, but not the obligation, to exchange at a set rate. The option premium is an explicit cost, but the structure can preserve some favorable currency participation.
- FX swaps: combine currency exchanges at different dates and can be used to manage funding or roll existing exposures.
- Spot transactions: exchange currencies immediately and are part of currency management, although a spot trade alone does not create a continuing hedge.
These tools are discussed in the CFA Institute’s currency-management material. The practical outcome depends on contract terms, collateral, counterparty arrangements, liquidity and how closely the hedge matches the fund’s actual holdings.
Why a hedge can gain or lose money
A hedge’s result is not simply the opposite of the currency’s spot move. Short-term interest-rate differences between the two currencies influence forward pricing and therefore the cost or income of maintaining the position. Transaction spreads, commissions, market liquidity, roll timing and differences between the hedge currency and the portfolio’s underlying currencies also affect tracking.
When a fund says it is “100% hedged,” that usually refers to a targeted notional amount at a particular rebalance date, not a promise that every moment of currency risk has disappeared. Portfolio values change daily, and contracts may not cover small residual exposures or cash flows perfectly.
Should you hedge international stocks?
There is no hedge ratio that is optimal for every investor, market or period. Start with the purpose of the allocation rather than with a recent currency chart.
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If your priority is lower short-term volatility
A hedged share class or a separate hedge may make the equity allocation behave more like a local-currency asset. This can be useful when the money has a near-term spending date in the home currency and a large currency swing would jeopardize that plan. The hedge removes a potential source of diversification as well as a potential source of losses.
If your priority is long-term diversification
Leaving some or all exposure unhedged gives the portfolio an asset whose value is not tied entirely to the home economy and home currency. That exposure can help when the home currency weakens, but it can also add substantial short- and medium-term fluctuations. A long investment horizon does not make the volatility disappear; it only gives more time for outcomes to vary.
If you are comparing a hedged and an unhedged fund
- Identify the investor base currency used for the published performance.
- Confirm the exact equity index or market and the currencies represented.
- Read the stated hedge ratio and whether it is fixed, dynamic or allowed to vary.
- Match the start and end dates; currency regimes can change quickly.
- Compare the objective: absolute return, volatility, drawdown control or risk-adjusted return.
- Account for expense ratios, derivative costs, interest-rate differentials, transaction costs and any tracking difference.
Comparing a hedged fund in one currency with an unhedged fund in another, or comparing different periods, can produce a conclusion about implementation rather than about the underlying strategy.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What the historical evidence shows—and what it does not
US-dollar investors from 2010 through June 2024
In an MSCI analysis covering January 2010 through June 2024, USD investors who hedged several international markets had both lower risk and higher returns than unhedged investors in the index comparisons. Japan was an exception for risk: hedging increased risk there. MSCI linked the Japanese result to the unusual relationship between Japanese equities and the yen-dollar exchange rate. These findings describe that sample, those markets and that investor perspective; they are not a universal forecast.
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For the MSCI ACWI ex USA Investable Market Index, MSCI reported that currency movements eroded the gains from local equity markets for a USD investor between December 31, 2021 and June 28, 2024. The result illustrates how a favorable local-market period can translate into a much smaller home-currency gain. It does not establish that currency will always be a drag.
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Evidence through June 30, 2025
A later MSCI analysis emphasized that the effect of hedge ratios differs across currency pairs and investment objectives. Short-term interest-rate differentials change hedging costs, so a ratio that looked attractive in one period may not have the same economics later. The analysis supports evaluating the exposure rather than adopting a fixed ratio by rule.
A separate factor-strategy statistic
A 2016 CFA Institute digest summarized a study in which factor-based long-short country equity-index portfolios produced annual excess returns of 7%–12% in USD without hedging. That figure belongs to a specific strategy and study design. It is not a typical investor return, a forecast, or a measurement of the currency contribution to a diversified portfolio. The digest also reported that exchange-rate movements did not offset the study’s country equity return differentials.
A practical checklist for diagnosing a disappointing return
- Write down the currency in which your wealth and spending are measured.
- Find the fund’s local-currency and home-currency performance for the same dates.
- Check whether the share class is hedged, the target ratio, and the rebalance schedule.
- List the fund’s largest currency exposures rather than relying on its country label.
- Separate equity performance, currency translation, fees and tracking difference.
- Look for valuation-time differences when comparing a fund with an overseas market that closes hours earlier.
- Review the period: a one-month currency move can dominate a diversified equity result, while a multi-year comparison may show a different relationship.
Common mistakes to avoid
Assuming a strong dollar always means foreign stocks lose
A stronger dollar tends to reduce the dollar value of foreign-currency assets, but local equity gains can outweigh that effect. Companies may also benefit or suffer from exchange rates through their revenues and costs, which affects local share prices independently of translation.
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Forward pricing, interest-rate differentials, trading spreads, roll costs and operational requirements all affect the result. A hedge can reduce an adverse currency move and still produce a lower net return than an unhedged position when the foreign currency appreciates.
Using one country’s experience as a rule
Currency-equity relationships differ by market. Japan’s experience in the MSCI sample demonstrates why a result observed in one currency pair should not be generalized to every international allocation.
Confusing local and home-currency charts
Always check the currency label, total-return convention and date range before deciding that a fund failed to track its market. A local index and a home-currency fund are measuring different things by design.
Bottom line
International equity returns are two-dimensional: the companies and markets can move, and the exchange rate can move at the same time. A home-currency investor benefits when the foreign currency appreciates and is hurt when the home currency strengthens, with the combined result determined by both changes. Hedging can narrow that currency effect, but its costs and outcomes vary by currency pair, period, market and objective. The sound comparison is therefore not “hedged or unhedged in general,” but which base currency, index, hedge ratio, dates, purpose and implementation costs fit your investment decision.
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