EUR-Hedged vs Unhedged in 2026: Should a Euro Investor Hedge the S&P 500/MSCI World?
Educational material. Not financial advice.
What Is a Hedged ETF?
Buying the S&P 500 or MSCI World is almost always a bet not only on equities, but also on currency. The same index exposure can produce very different results in euros simply because USD/EUR moved in a different direction over the year. That’s why EUR-based investors keep running into one question: leave the currency risk as it is (unhedged) or choose an EUR-hedged version and pay for a smoother ride.
Hedging costs money, and that cost isn’t always obvious in the TER. Below is how ETF currency hedging works, where the price is hidden, how to read tracking difference, and when hedging makes a portfolio more practical — versus when it just adds friction.
ETF Currency Risk: Why the Same Index Delivers Different EUR Results
When you buy an unhedged S&P 500 / MSCI World ETF, you get the equity return (price appreciation + dividends) plus/minus the currency effect (USD/EUR, and other currencies in MSCI World).
The simplified logic:
If the dollar strengthens versus the euro, an unhedged ETF looks better in EUR.
If the dollar weakens, FX can eat a meaningful part of your return.
With MSCI World the effect is broader: it’s a basket of currencies, but the US weight means USD still dominates the story.
EUR-Hedged ETFs: How Currency Hedging Works Inside an ETF
An EUR-hedged ETF tries to neutralize FX swings versus the euro using FX forwards/swaps and regular hedge rolls (often monthly).
Hedging does not remove equity risk. It removes (or reduces) the currency component so the result is closer to the index’s pure equity return, translated into EUR with FX largely neutralized.
The Cost of Currency Hedging
1) Interest-rate differential (the main driver)
The hedging price is mostly linked to the rate difference between currencies.
If USD rates are higher than EUR rates, hedging typically drags on returns.
If the opposite is true, hedging can be cheaper.
This doesn’t always show up as an explicit fee. More often it appears as a persistent performance gap versus what investors intuitively expect.
2) Operational costs and rolling
Even with the same TER:
- forwards must be rolled,
- there are spreads and operational frictions,
- extra tracking noise can appear.
3) Tracking difference (not just TER)
Tracking difference is the real-world gap between the fund and its benchmark/target.
For hedged funds it often matters more than TER, because part of the cost lives inside the hedging mechanics.
Compare the actual gap between hedged and unhedged versions over longer windows (1/3/5 years), not a single month.
When Hedging Can Genuinely Make Sense
Scenario A: short horizon and a euro-specific goal
If you expect to spend the money in EUR within 1–3 years (down payment, renovation, a big purchase), FX volatility may be unnecessary. In that case an EUR-hedged ETF can reduce noise.
Scenario B: FX swings break your discipline
Many investors underestimate the behavioral angle. If an FX-driven drawdown makes you sell at the wrong time, paying for a smoother path can be rational.
Scenario C: your portfolio is already heavily USD-exposed
If your income and spending are in EUR, but most assets are dollar-linked (US equities + USD instruments), currency risk can become too concentrated. A partial hedge can reduce that imbalance.
When Unhedged Often Wins Over the Long Run
Long horizon (10+ years) + regular investing (DCA)
Over long horizons FX volatility often “averages out,” especially with steady contributions. Monthly buying naturally averages your FX entry points too.
You prefer simplicity and fewer hidden frictions
Unhedged is mechanically simpler: fewer moving parts, fewer embedded costs, fewer unexplained deviations.
Also, in risk-off periods the USD is often discussed as a “defensive” currency relative to EUR — not a rule, not a guarantee, but a commonly cited potential tailwind for unhedged exposure.
Hedged S&P 500 UCITS: What to Check Before Choosing a Fund
- The hedge is truly EUR-hedged (not just the fund trading in EUR).
- Hedging method and roll frequency (if disclosed).
- Tracking difference over 1–3 years, not only TER.
- Liquidity and spreads (especially for smaller funds).
- Benchmark structure (S&P 500 vs MSCI World vs “World ex US” are different risks).
Should you Hedge MSCI World in 2026?
MSCI World is diversified by companies, but not necessarily by currency. The US weight means you still have a big USD exposure.
A practical approach many investors use:
- keep the core unhedged,
- add partial hedging only for the portion tied to shorter-term EUR needs.
FAQ
What is a hedged ETF, and how is it different from an ETF trading in EUR?
A hedged ETF reduces FX risk (e.g., USD/EUR) via forwards/swaps. An ETF that trades in EUR without “hedged” in the name can still carry full currency risk.
Which is better in 2026: EUR-hedged or unhedged?
It depends on horizon and goal. For long horizons and DCA, unhedged is often preferred. For 1–3 year EUR goals or if FX volatility breaks discipline, hedged can be reasonable.
Can you see hedging costs in the fee?
Partly, but tracking difference and historical performance gaps often reveal more, because a lot of the hedging cost is embedded in how the hedge is implemented.
Conclusion
An EUR-hedged ETF is something you buy for a specific function: reducing currency noise for euro-denominated goals and keeping returns closer to pure equity performance. If your horizon is long and you invest regularly, the unhedged route is often simpler and more transparent on costs — you accept FX volatility and let time and discipline do the smoothing.
And if you invest in tranches, any cash waiting for the next DCA buy or rebalance can be parked in fixed-yield tools — for example, Hexn deposits with regular payouts — so the plan keeps working even between portfolio actions.