In recent years, more and more European investors have been discovering the advantages of investing through exchange-traded funds (ETFs) that track broad stock market indices from around the world. ETFs provide easy, low-cost, and diversified access to global markets. However, there is one factor that often remains significantly underestimated and, in the current market environment, has become decisive for actual investment returns: currency risk.
Taking on an Additional Exposure We Often Overlook
When purchasing an ETF that tracks an index denominated in a foreign currency, the investor is effectively taking on two distinct exposures:
- Market risk – changes in the value of the underlying index
- Currency risk – movements in the currency in which the assets are denominated
This is a key point that many investors overlook when gaining exposure to foreign financial instruments—whether equities, bonds, commodities, or raw materials.
For example, when a European investor buys an ETF tracking the S&P 500 (even if the ETF itself is traded in euros), they are not only buying U.S. equities but also taking a U.S. dollar position. If the dollar depreciates against the euro, this directly reduces the final investment result.
That is why it is crucial to assess investment performance in the currency in which we actually incur our expenses.
ℹ️ A return of +10% in U.S. dollars does not equal a +10% increase in purchasing power in euros.
What Does a Currency-Hedged ETF Mean?
A currency-hedged ETF is an exchange-traded fund that:
- tracks a specific index (for example, the FTSE 100);
- neutralizes currency risk through currency hedging.
The goal is for the investor to receive the return of the index itself, without speculating on movements in the foreign currency.
The hedge is typically implemented through currency forward contracts and significantly reduces the impact of currency fluctuations.
The main equity indices that attract European investors and for which currency-hedged ETF options are available include:
For all of these indices, there are passively managed currency-hedged ETFs that allow European investors to focus on market performance, without currency distortions.
Why Currency Risk Is Especially Important in 2026
In the current market environment, we have seen significant depreciation of several major currencies against the euro since the beginning of the year:
*Currency movement data is based on publicly available information from the European Central Bank.
For European investors, this has a direct impact. Even when equity indices show positive growth in their local currency, returns measured in euros can be zero or even negative.
Simplified example:
- NASDAQ 100: +10% in USD
- EUR/USD: +12% → depreciation of the dollar against the euro
Final result for the euro-based investor: a 2% loss on invested capital.
In other words, the market rises, but the currency movement erodes the return.
Without going into excessive macroeconomic detail about why currencies are depreciating (and why this is not just temporary noise), one thing is clear: currency risk is not a free bonus, but a real factor that can negatively affect results for years.
How to Read ETF Charts Correctly
There is another important practical detail that often confuses investors.
If we compare the chart of an index with the charts of different ETFs tracking that index, we will observe the following:
Currency-Hedged ETFs
Currency-hedged ETFs usually show a price chart very similar to that of the index itself. The movement of ETF prices primarily reflects market performance—corporate and economic dynamics.
Non-Hedged ETFs
ETFs traded in euros but without currency hedging also embed the movement of the index’s base currency. This leads to distorted charts—periods in which the index rises while the euro-denominated ETF does not, or even shows negative returns during a positive market.
This is not a charting error—it is the currency effect, visualized in the ETF price.
The Cost of Currency Hedging Is Small Relative to Its Impact
A common argument against currency-hedged ETFs is that they have slightly higher administrative costs—the additional cost of hedging, which is reflected in the price of ETF shares.
This is true, but context is everything.
The cost of currency hedging is typically in the range of 0.1%–0.3% per year, while the average long-term return of broad equity indices is significantly higher. Currency movements, on the other hand, can easily reach 5%–12% per year, as seen in the current environment.
In other words, we pay a small, predictable cost to eliminate a large and unpredictable risk.
Why Currency-Hedged Funds Are a Logical Choice in This Environment
Focus on the underlying asset and its drivers
As a long-term equity investor, your focus is on economic growth, rising corporate earnings, innovation, efficiency, and productivity.
You do not want currency speculation, political decisions, or short-term FX movements to determine the return on your savings. Currency-hedged funds allow you to concentrate on market risk, not currency noise.
More stable and predictable returns in euros
This is particularly important for investors who save long-term, plan future expenses in euros, and measure success through increased purchasing power in their home country.
Better investment discipline and fewer decision errors
Currency movements often create noise that misleads investors. When returns change sharply due to currency movements rather than market fundamentals, this complicates performance evaluation, leads to incorrect conclusions (“the index is underperforming”), and provokes emotional decisions—exiting or entering positions at the wrong time.
Conclusion: Currency-Hedged ETFs
In an environment of significant currency depreciation against the euro, European investors must think beyond the nominal growth of indices. Positive returns in local currency do not guarantee positive returns in euros.
EUR-hedged ETFs tracking broad indices are not more aggressive or more complex—they are simply better adapted to the desired exposure and the variables that matter to European investors.
If we live, spend, and plan in euros; if our goal is long-term investing rather than currency speculation; and if we want to clearly understand where profits or losses come from, then currency-hedged index ETFs represent a logical and disciplined choice—especially in a period of strong currency volatility.
Want more long-term investment analysis like this?
Subscribe to the FinTech Observe newsletter to receive expert insights on markets, ETFs, risk, and long-term investing — straight to your inbox.
Leave a Comment