The currency question is one most NZ investors never consciously answer. Here is the maths, the trade-offs, and a framework for deciding.
In Week 1 of this series I flagged currency as the variable that most NZ investors carry without realising it. Every dollar invested in international assets through an unhedged fund is exposed to NZD movements. When the NZD strengthens, your international returns shrink in local currency terms. When it weakens, they expand. Over any given year, this effect can be larger than the return from the underlying investments themselves.
Most NZ investors have never made a deliberate choice about this. They are in whatever fund their platform defaulted them into, and the currency exposure they carry is an accident of that default rather than a considered decision. This week I want to give you the framework to make that decision properly.
When a fund hedges its currency exposure, it enters into forward contracts to lock in exchange rates for a portion of its overseas holdings. The effect is to neutralise most of the NZD/foreign currency movement on those holdings — so the return you receive is close to the underlying asset return in local currency terms, regardless of what the exchange rate does.
Hedging is not free. The cost is driven by the interest rate differential between New Zealand and the currency being hedged against. When NZ interest rates are higher than US interest rates, hedging NZD/USD exposure costs money — typically 1% to 2% per year in recent years. For most of the past decade, hedging NZD/USD has carried a cost. That cost is a drag on returns that compounds significantly over long investment horizons.
To make the trade-off concrete: on a $100,000 international equity portfolio growing at 8% gross per year, a 1.5% annual hedging cost reduces the net return to 6.5%. Over 20 years, the difference in terminal value between the hedged and unhedged portfolio is approximately $114,000. Over 30 years it is more than $345,000.
$100,000 portfolio, 8% gross return, 20-year horizon
Illustrative only. Does not account for currency movements on the unhedged portfolio, which add variance in both directions.
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The cost of hedging is real, but it is not the only relevant variable. Currency variance is not just an upside risk. The NZD/USD has moved by more than 20% within single years, in both directions, over the past two decades. For an investor whose portfolio is a significant portion of their net worth, a 20% currency movement in an unfavourable direction is a real wealth shock that affects behaviour. Investors who experience large drawdowns — even temporary ones driven by currency rather than underlying asset performance — are more likely to sell at the wrong time.
The case for hedging is also stronger for investors with shorter time horizons. A 55-year-old investor with a ten-year horizon to retirement has less time to absorb currency volatility than a 30-year-old with a 35-year horizon.
For long-term investors with 20-plus year horizons, the compounding cost of hedging is the primary argument against it. Over long periods, currency movements tend to mean-revert — the NZD does not trend indefinitely in one direction. The variance that hedging removes is largely temporary noise over a 30-year investment horizon, while the cost of hedging is permanent and compounds every year.
There is also a natural hedge argument. Many NZ investors have the majority of their income, their home equity, and their other assets denominated in NZD. Their international investment portfolio may be the only meaningful source of non-NZD exposure in their financial life. Hedging that exposure back to NZD increases their overall concentration in the NZ economy, which is the opposite of diversification.
For a long-term investor, the compounding cost of hedging is permanent. The currency variance it removes is largely temporary noise over a 30-year horizon. That asymmetry favours unhedged for most long-term NZ investors.
Most major Smartshares international funds come in both hedged (H) and unhedged variants. USF is unhedged, USH is hedged. The investor chooses. This transparency is genuinely useful — you know exactly what currency exposure you are carrying.
Kernel's global index funds are predominantly unhedged. This aligns with the long-term, low-cost philosophy of the platform and avoids the hedging cost drag for investors with long horizons.
Milford manages currency exposure actively as part of its overall investment approach. The hedging ratio varies over time based on the fund manager's view — one of the dimensions of active management.
Simplicity's international equity funds hedge a portion of their currency exposure. The partial hedge approach aims to reduce variance without incurring the full cost of complete hedging.
The most important thing is to make a deliberate choice rather than accepting whatever default your platform or fund manager has set. Check whether your current funds are hedged or unhedged, understand what that means for your portfolio, and decide whether it matches your actual situation.
Whether hedged or unhedged, if your overseas holdings exceed $50,000 at cost, FIF applies. Compare FDR vs CV and find your lowest legal FIF income for 2025–26. Calculate my FIF tax →
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