This week's chart comes from the Australia Quarterly Economic Briefing from the Morningstar Manager Research team (Feb 2025).

Many Aussie investors are increasing their exposure to international equities, often choosing managed funds or ETFs to access the asset class. Part of this process is deciding whether you want hedged or unhedged exposure. 

First, an explainer. There are two main components of return for international equities – the return of the underlying investment and changes in exchange rate. Hedged investments remove the currency component of the return, resulting in just getting the investment return. There are several factors that influence the relative performance of currencies. Global geopolitical situation, relative levels of interest rates and inflation are some of the factors that may influence currencies. To correctly make a directional bet on currency is hard. Given the tax and transaction costs of switching between hedged and un-hedged products means investors will want to stick with your choice over the long-term.

It is tempting to look at the returns and make a decision based on the highest number. However, there are several better indicators that could help investors make a more informed decision about which to choose.

Decisions for hedging may include reducing volatility in your portfolio and getting the pure market return without currency fluctuations included. Decisions to leave your investments as unhedged can mean that you can access cheaper investments (hedged investments are often more expensive). These issues, as well as others including diversification vs. hedging are discussed in our Investing Compass episode about whether to hedge your investments.

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