Hedged vs Unhedged Fund Calculator

New Zealand investors buying an international index fund are usually offered two versions of the same thing: hedged and unhedged. They track the identical index and hold the identical companies, and in any given year they can produce returns ten or twenty percentage points apart. The difference is entirely the New Zealand dollar. An unhedged fund passes the currency movement straight through to you, so a falling dollar boosts your return and a rising one erodes it. A hedged fund removes that effect and delivers the index return in New Zealand dollar terms, at the cost of a small ongoing drag. This page shows both numbers side by side for any index return and any currency movement you enter, and it does the compounding properly, because the currency effect multiplies the return rather than adding to it and the difference between those two treatments grows quickly at larger movements. The more useful output is not the single answer but the range: a table running from a fifteen percent fall in the dollar to a fifteen percent rise, showing what is genuinely at stake. Nobody can tell you which way the currency will move, and any tool that implies otherwise is selling something. What this can tell you is how much the answer depends on it.

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Same Index, Same Companies, Different Answer

A hedged and an unhedged fund tracking the same index hold the same shares in the same proportions. Everything that happens to those companies happens identically to both. The only difference is what the New Zealand dollar does in the meantime, and in a single year that can be worth more than the market itself.

On the worked example the gap is 5.83 percentage points, on a market return of 8.00%. In dollar terms, on a $50,000.00 investment, it is $2,917.11 in one year, from a decision most investors make by picking whichever appeared first in the list.

Worked Example: 8% Index, Dollar Falls 5%

The hedged version is straightforward: 8.00% index return less a 0.15% hedging cost gives 7.85%. The currency does not enter.

The unhedged version compounds the two effects. A 5% fall in the dollar means foreign assets are worth 1 divided by 0.95, or 1.052632 times more when converted back. Applied to the grown value, that gives (1.08 × 1.052632) − 1, which is 13.68%.

Note it is not 13.00%. The currency contributed 5.68 percentage points rather than 5.00, because the gain applies to the grown amount. That distinction is small here and becomes substantial at larger movements: a 15% fall contributes 19.06 points, not 15.

Forty-Two Percent Of Your Return Was Not The Market

Of the 13.68% unhedged return, 5.68 points came from the currency. That is 42% of the total, from something the investor did not choose, cannot influence and probably did not model.

In a flat market the proportion approaches everything. If the index returns 0% and the dollar falls 10%, an unhedged fund returns 11.11% and every cent of it is currency. Investors who conclude from such a year that their fund selection was excellent have learned the wrong lesson.

An unhedged international fund is two positions in one: the market you meant to buy, and a currency bet you may not have realised you were taking. That is not an argument against it. It is an argument for knowing.

The Break-Even Is Almost Zero

The currency movement at which both versions produce identical returns is a 0.14% rise in the dollar. Effectively nothing.

That is the most important number on this page, and it tells you something uncomfortable: the hedging cost is so small relative to typical currency movements that it barely tilts the decision. This is not a choice between a cheap option and an expensive one. It is close to a pure bet on direction, with a rounding error attached.

Which means anyone presenting hedged or unhedged as clearly superior is either forecasting the currency or has not done this arithmetic.

Horizon Answers It Better Than Opinion

Since direction is unknowable, the useful question is how long the money is invested for and what it is eventually for.

Over long horizons, currency movements tend to fluctuate rather than trend indefinitely, so their effect on a multi-decade holding is smaller than in any single year. That argues for not paying to hedge a long-term global equity position, and for tolerating the year-to-year noise.

Over shorter horizons, or where the money has a known New Zealand dollar purpose on a known date, a house deposit in three years or a retirement drawdown starting soon, the currency swing can comfortably exceed the investment return. There, hedging buys certainty about something that would otherwise dominate the outcome, and the cost is a reasonable price for it.

Our investment time horizon risk calculator covers the general version of that reasoning, and our portfolio allocation by age calculator handles the broader allocation question.

Splitting Is A Legitimate Answer

A fifty-fifty split between hedged and unhedged produces $55,383.55 on the worked example, between the two outcomes. It halves the currency exposure and halves the hedging cost.

It also guarantees you will never have made the best possible choice, and never the worst. For a decision genuinely driven by an unpredictable variable, that is a coherent position rather than an evasion, and it removes the temptation to change your mind after a bad year, which is where most of the real damage in this decision gets done.

What This Does Not Cover

Two things sit outside this calculation. Tax is one: the FIF rules may apply to either version depending on how the fund is structured and how much you hold offshore, and that can matter more than the hedging decision. Our FIF de minimis calculator establishes whether they apply to you.

The second is the cost of getting money there and back. A hedged fund removes currency risk on the investment; it does not remove the conversion cost of buying in. Our US share FX cost calculator covers that side, which for a New Zealand investor is frequently the larger and more certain cost of the two.

Related NZ International Investing Calculators

• US Share FX Cost Calculator: what converting the money costs in the first place.
• Multi-Currency Exposure Calculator: which currencies your portfolio is actually exposed to.
• Total Cost of Owning a US ETF: every cost layer on an offshore holding.
• FIF De Minimis Calculator: whether the FIF rules apply to you.
• ETF vs Managed Fund Calculator: the wrapper choice, separate from the currency one.