Dollar dilemma as investors switch to hedged ETFs

ETF providers Betashares and BlackRock are reporting increased flows for currency hedged vehicles, but an adviser has warned on the potential financial implications of changing currency for consumers.

The first half of 2025 saw significant volatility in the US market following US President Donald Trump’s so-called “Liberation Day” tariffs in April, while inflation, growth concerns, and public debt have put negative pressure on the US dollar, causing it to weaken on the global stage.

In response to this, some investors are turning to currency-hedged ETFs to shore up against further volatility in the US dollar.

Speaking with Money Management, Betashares associate director and investment strategist Thomas Wickenden said the firm has seen a marked increase in flows to currency hedged ETFs since April.

This period, Wickenden explained, was the height of policy uncertainty and fears regarding the potential outcomes of tariffs where investors were constantly hearing about US market weakness and US dollar weakness, which likely drove the demand for currency hedged funds.

“Historically, under normal circumstances within the Australian ETF market, we tend to see about a one to five, or even lower, split between people buying currency hedged versus non-hedged exposures. Usually, five times the amount goes into unhedged exposures. 

“This year though, we’ve seen a much higher proportion of flows going towards currency hedged ETFs. In March and April, across those two months we actually saw more money going to hedged ETFs than non-hedged ETFs. So, it’s definitely been a really big trend this year.”

Notably, in Betashares’ latest monthly review, currency hedged funds accounted for three of the top 10 monthly inflows in July, including Vanguard’s Global Aggregate Bond Index (Hedged) ETF, which saw the second-highest inflows for the month with more than $290 million, suggesting a wide demand for these funds.

BlackRock likewise saw an increase in currency hedged flows during this time with the iShares S&P 500 (AUD Hedged) ETF attracting nearly $500 million in net flows, compared to iShares S&P 500 (AUD Unhedged) ETF which saw around $200 million, surpassing the unhedged fund for the first time this year.

The benefits of the hedged version have been reflected in its performance with the hedged version of the S&P 500 ETF returning 5.69 per cent over the six months to June 2025 compared to 0.18 per cent for the unhedged version.
Three of its top five ETFs on an inflow basis year-to-date are hedged exposures, it said.

Speaking with Money Management, iShares ETF and index investments specialist at BlackRock, Tamara Haban-Beer Stats, said the strong inflows into hedged USD-denominated ETFs suggest that Australian investors are seeking to lock in currency-hedged positions across asset classes in response to a weakening US dollar.

It added: “While the US dollar remains the dominant global currency and US assets continue to be core portfolio holdings, we’ve seen increased flows to our currency-hedged ETFs this year. The trend reflects investors reassessing their US asset exposure amid concerns over US trade policy and the fiscal outlook.”

Adviser concerns

But even as flows remain strong among currency hedged ETFs, Bryn Evans, private wealth adviser at Integro Private Wealth, suggested clients need to consider the potential pitfalls before moving funds away from unhedged to hedged funds.

“If you have a fixed international exposure, and your entire exposure is unhedged, and you want to introduce some hedging into your portfolio, if you’ve got unrealised gains on the assets that you’re going to need to sell down to make space for a hedge position, then that’s a capital gains tax (CGT) event,” Evans told Money Management.

“There’s obviously potential tax consequences to that. For us, there needs to be a demonstrable reason to make a change on the basis of currency hedging in a portfolio because there are costs incurred, both taxation and also transaction costs with regards to changing your positions in the portfolio.”

While clients may feel the need to react when markets shift, Evans said it is important advisers aren’t “flip flopping between one or the other”, prioritising a dynamic approach while keeping focus on the long-term strategy.

“There’s always something happening, so we try not to make decisions and portfolios on the basis of what’s happening at a particular point in time. It’s just on the basis of a balance of probabilities. 

“When it comes to currency hedging in international markets, you need to think about two things, not just one, that's the performance of the underlying assets, but also the currency movements as well whenever you hold assets that are not denominated in AUD, and we see, typically, an element of risk hedging with currency.”

As an alternative, Evans suggested that utilising cash or other income not yet invested is a more cost-effective way to approach this and access the benefits of hedged funds.