Most Australian retirees with international shares have never explicitly chosen between hedged and unhedged exposure. A hedged position removes currency volatility, making AUD returns more predictable but adding a hedging cost of around 0.10–0.30% per year. Unhedged exposure benefits when the AUD weakens — often during crises — but adds volatility. For most retirees, a 50/50 mix reduces year-to-year currency swings while preserving some natural-hedge benefit.
For Australian retirees who hold international shares — directly, via Australian-listed exchange-traded funds, or through their super fund's international allocation — there is a portfolio decision that quietly affects year-to-year returns and that most retirees have never explicitly made: whether the international exposure is currency-hedged or unhedged. The decision can produce meaningfully different outcomes during periods of currency volatility, and over a 20-year retirement the choice compounds. For most retirees, the right answer is neither pure-hedged nor pure-unhedged but a deliberate mix — and reviewing the existing position to make it deliberate is a sensible annual task.
The mechanics are worth restating. When an Australian investor holds international shares — say, a global equities ETF — the investment is denominated in foreign currency. The investor's return in Australian dollars depends on two things: the change in the underlying share price (in foreign currency terms) and the change in the AUD exchange rate against that currency. If the underlying shares rise 10% but the AUD also strengthens 10% against the foreign currency, the AUD return is roughly zero — the share gain is offset by currency loss. If the AUD weakens 10%, the AUD return is closer to 20% — share gain plus currency tailwind. The currency leg can multiply or wash out the share-price leg.
For Australian-listed ETFs, both hedged and unhedged versions are typically available. The hedged version holds the underlying shares but also holds rolling forward foreign exchange contracts that effectively convert the foreign currency exposure back to AUD. The result: the investor's return tracks the underlying share price change, regardless of currency movements. The unhedged version exposes the investor to both legs.
Common Australian-listed pairs include the Vanguard MSCI Index International Shares ETF in unhedged form (VGS) and hedged form (VGAD). Similar pairs are available from BlackRock/iShares, BetaShares, State Street/SPDR, and other major issuers, covering global equities, US-specific exposure, and other regions. The choice is made at product selection — buying VGS gives unhedged exposure; buying VGAD gives hedged.
The case for hedging is straightforward. For a retiree drawing AUD spending from the portfolio, currency volatility translates directly into income volatility. A 15% AUD strengthening against the USD can reduce the AUD value of unhedged US holdings by 15%, even if the US share price has not moved. For a retiree relying on those holdings to fund spending, the year-to-year uncertainty creates planning friction and behavioural pressure. Hedging removes the currency leg and produces returns that track the underlying shares only — more predictable in AUD terms, easier to plan against. The behavioural benefit is real: retirees who anxiously check portfolio values during periods of currency volatility can often be substantially calmer with a hedged position, even if the long-run mathematical advantage is smaller.
The case against hedging is also real. Historically, the AUD has tended to weaken during global economic crises and strengthen during boom times. Unhedged international exposure therefore acts as a partial hedge against domestic Australian downturns — when local equities are weak, the AUD often weakens too, boosting the AUD value of unhedged international holdings. This natural-hedge dynamic is one reason many practitioners advocate at least some unhedged exposure even for retirees: it provides defensive diversification when the rest of the portfolio is under stress.
Hedging also has a direct cost. The hedging programme — buying rolling forward FX contracts to lock in exchange rates — adds 0.10% to 0.30% per annum to the cost of holding a hedged ETF compared to its unhedged equivalent. Over a 20-year retirement, this compounds to a meaningful return drag. The premium is usually worth the volatility reduction for retirees, but it is not free.
For most retirees, the right answer is neither fully hedged nor fully unhedged but a deliberate mix. A common practitioner default is 50/50 — half the international exposure hedged, half unhedged. The mix reduces year-to-year volatility without eliminating the natural-hedge benefit. It reduces the long-run hedging cost by hedging only half the exposure. It provides flexibility to adjust over time as circumstances change. And it produces a portfolio that is reasonably comfortable in both bullish and bearish AUD environments.
The right mix for any individual retiree depends on a few factors. Heavier hedging is appropriate if the portfolio is being relied on for substantial near-term AUD spending and if the retiree has limited tolerance for currency-driven volatility. Lighter hedging is appropriate if there are plans for overseas spending (extended travel, foreign-domiciled family, partial retirement abroad — in any of which the unhedged foreign exposure provides natural cover for the foreign spending). Heavier hedging is appropriate if the retiree is behaviourally prone to anxiety about portfolio swings; lighter hedging is appropriate if the retiree is comfortable with volatility and values long-term return potential.
Implementation through Australian-listed ETFs is straightforward. Holding 50/50 means buying both the hedged and unhedged versions of the same underlying index in equal proportions. Rebalancing back to 50/50 happens at the annual portfolio review. The two products track the same underlying index but with different currency treatments, so the difference between them in any given year reflects pure currency movement.
The Centrelink treatment is the same regardless of hedging. International shares (hedged or unhedged) are financial assets for Age Pension purposes, included in the assets test at AUD market value and subject to deeming under the income test. Currency movements affect the AUD market value over time; periodic revaluation may be required. The hedging decision is portfolio-construction driven rather than Centrelink-driven.
A few common pitfalls are worth flagging. Treating hedging as binary — either fully hedged or fully unhedged — is rarely optimal. Choosing on cost alone overlooks the volatility-reduction value, which for retirees can substantially exceed the 0.10–0.30% annual premium. Forgetting non-AUD spending plans means missing the natural-hedge benefit of unhedged exposure for foreign-currency expenses. Setting the mix once and not reviewing means the portfolio drifts away from current circumstances as retirement evolves.
For most retirees, this is exactly the kind of decision worth making deliberately rather than by default. A short conversation with an adviser about the current hedging mix — and whether it matches the retiree's spending plans, behavioural preferences, and time horizon — produces an answer that often improves the position without major upheaval.
Key takeaways
- Whether international shares are held hedged or unhedged is a portfolio decision most retirees have never made explicitly — the default is often whatever ETF was first purchased.
- A hedged position removes currency volatility from AUD returns but adds a direct cost of 0.10–0.30% per annum and eliminates the natural-hedge benefit of unhedged exposure during AUD weakness.
- The AUD historically weakens during global economic crises — meaning unhedged international exposure tends to rise in AUD terms precisely when domestic assets are falling, providing partial portfolio insurance.
- For most retirees, a 50/50 split between hedged and unhedged versions of the same index (e.g. VGS and VGAD) is a reasonable starting point — reducing volatility without eliminating the natural-hedge benefit.
- The Centrelink treatment is identical for hedged and unhedged holdings: both are financial assets assessed at AUD market value and subject to deeming under the income test.
Frequently asked questions
What is the difference between a hedged and unhedged international shares ETF?
An unhedged ETF exposes the investor to both the underlying share price movement and the AUD exchange rate movement against the foreign currency. A hedged ETF uses rolling forward FX contracts to eliminate the currency leg — the investor's AUD return tracks only the underlying share price, regardless of what the AUD does. Both hedged and unhedged versions of the same underlying index are available for most major markets as Australian-listed ETFs.
Should retirees hedge their international share exposure?
For most retirees, neither fully hedged nor fully unhedged is ideal. Hedging reduces income volatility (useful for retirees drawing AUD spending from the portfolio) but adds a cost and eliminates the natural-hedge benefit of unhedged exposure during AUD weakness. Unhedged exposure can amplify returns when the AUD weakens but creates year-to-year uncertainty. A 50/50 mix between hedged and unhedged versions of the same index is a common practitioner starting point.
What is the cost of hedging international share exposure?
The hedging programme adds approximately 0.10–0.30% per annum to the total cost of holding a hedged ETF compared to its unhedged equivalent. Over a 20-year retirement, this compounds to a meaningful reduction in total return. The hedging cost is offset by the volatility reduction — for retirees relying on their portfolio for income, the reduction in currency-driven swings can justify the additional cost.
Does currency hedging affect the Age Pension means test?
No. The Centrelink treatment is the same regardless of whether international shares are held hedged or unhedged. Both are treated as financial assets under the assets test (assessed at current AUD market value) and as financial investments subject to deeming under the income test. Currency movements affect the AUD value over time and may require periodic revaluation, but the hedging decision itself has no separate Centrelink consequence.
Should I factor in overseas spending plans when deciding on hedging?
Yes. For retirees planning significant overseas spending — extended travel, a foreign property, or family support in another currency — unhedged international exposure can provide a natural offset: if the AUD weakens, overseas spending costs more in AUD terms, but the unhedged holdings are also worth more in AUD. Hedging removes this natural alignment. Retirees with material foreign-currency spending should factor this into their hedging mix before committing to a heavily hedged position.