Hedged vs unhedged ETF calculator
Not sure whether to pay for the hedged share class? This tool quantifies what you pay versus what you reduce — volatility, breakeven FX drift, and expected value under your own assumptions.
TL;DR
- Estimated annual volatility for hedged and unhedged versions of your holding.
- Volatility reduction achieved by hedging and what it costs per percentage point removed.
- Breakeven FX drift — how much annual FX tailwind you need for unhedged to offset the hedge cost.
- Expected final portfolio value under each scenario given your return and drift assumptions.
- Currency direction prediction — this tool is deliberately neutral on FX forecasting.
- Interest rate parity or carry — the drift input is yours to set.
- Bid/ask spreads on the ETF or broker commissions.
- Taxes at any level.
How to use this calculator
Set your starting amount and monthly contribution. Enter your time horizon in years and your expected asset return before any FX effects. This is the base-currency return of the underlying index.
Enter an FX drift if you have a directional view — leave it at 0 if you want a direction-neutral comparison. Set FX exposure (100% for a fund with no internal hedging, less for a diversified multi-currency holding).
Enter asset volatility (typical equity index: 14–18%, typical bond index: 4–8%) and FX volatility (EUR/USD long-run average: roughly 8–10%). Set correlation to 0 if unknown — it adjusts the combined volatility estimate but rarely dominates.
Hedge effectiveness is how much FX volatility the hedge removes. Most professionally managed hedged ETFs achieve 95–98%. Extra annual cost is the TER difference between the hedged and unhedged share class, plus any implementation drag — typically 0.10–0.25% for major index funds.
Hedged vs unhedged tradeoff
Set your parameters and compare. Results update automatically as you type.
Planning estimates only. Volatility math uses a standard variance model. This tool does not forecast currency direction. No taxes or transaction costs included.
How to interpret the output
If the volatility reduction is small relative to the extra cost — for example, you pay 0.20% per year to remove 1.5 percentage points of annual volatility — hedging is probably not worth it for a long-horizon equity holding. The FX component is a small fraction of total equity risk.
Hedging is most commonly worth paying for on bond ETFs. A 10% FX swing can wipe out an entire year of bond returns. For a bond fund with 4% expected return and 5% asset volatility, removing 8–9 percentage points of FX volatility meaningfully changes the risk profile — and you are comparing that against a 0.10–0.15% hedge cost.
This is how much annual FX tailwind you would need every year for unhedged to "pay for itself" relative to hedged. If you expect no consistent FX direction — a reasonable assumption over 10-plus year horizons — the breakeven drift is essentially the hurdle you are betting against by skipping the hedge.
The gap between the two expected final values reflects only the directional drift input and the hedge cost. With FX drift set to 0 and a 0.20% hedge cost, the hedged version is simply expected to finish slightly lower due to its higher cost. The volatility results give the more useful comparison.
Go deeper on currency risk for EU investors
Learn how hedged and unhedged ETFs work in practice, compare FX conversion costs across brokers, or find out which UCITS ETFs are available on the most popular European platforms.
Go deeper
Frequently asked questions
What does currency hedged mean for a UCITS ETF?
A hedged ETF uses forward contracts or swaps to offset the impact of exchange rate moves on the fund's returns. If you hold a EUR-hedged version of a USD-heavy index, the fund mechanically neutralises most of the EUR/USD fluctuation each month. You still own the same underlying assets but your return in euros more closely tracks the local-currency performance of those assets rather than the combined performance of the assets plus the exchange rate.
Does hedging improve returns?
Not reliably. Hedging changes the risk profile rather than the expected return. Whether it helps or hurts your actual return depends entirely on which direction the exchange rate moves during your holding period. If your base currency strengthens, the hedged version wins. If it weakens, the unhedged version wins. Over long horizons currencies tend to revert, so the expected return difference is mostly just the hedge cost itself.
When is hedging more useful — equities or bonds?
Hedging is most commonly worth the cost for bond ETFs. For a short-duration bond fund yielding 3–4% per year, a 10% FX swing can completely overwhelm the entire year's return. For a global equity fund with 15–20% annual volatility, a 10% FX swing is a much smaller relative contribution to total risk, so the volatility reduction from hedging is proportionally smaller while the cost is the same.
What is hedge effectiveness and what is a realistic value to use?
Hedge effectiveness measures how much of the FX volatility the hedge removes. A perfect hedge removes 100% of FX volatility but is never achieved in practice because forward contracts roll monthly or quarterly and can introduce small gaps. Most professionally managed hedged ETFs achieve 95–98% effectiveness under normal market conditions. Using 95% is a reasonable conservative assumption.
What FX volatility should I enter if I do not know it?
For EUR/USD, realised annual FX volatility has typically ranged from 7% to 12% over the past decade, with a long-run average around 8–9%. For EUR/GBP it has been lower, around 6–9%. For EUR/JPY or EUR/EM currencies it can be considerably higher. If you are unsure, 10% is a reasonable starting point for major developed-market currency pairs.
Why does this calculator not predict which version will outperform?
Because nobody can reliably predict currency direction over an investment horizon. This calculator quantifies the risk-versus-cost tradeoff: how much volatility does the hedge remove, and what do you pay for that reduction. Whether FX moves in your favour or against you is a separate question that belongs in your own investment view, not in an objective planning tool.
QuantRoutine provides educational content only. Nothing on this page is an offer, solicitation, or recommendation to buy or sell any security or to open an account with any specific broker. Investments can lose value, and past performance does not guarantee future results. Calculator results are planning estimates only — actual costs and outcomes depend on your specific ETFs, broker, and market conditions. Always verify current pricing and eligibility on the relevant official website before making decisions. You are responsible for your own investment, tax, and legal decisions.