Should You Hedge Currency Risk in European Equity ETFs?

Unhedged European equity ETFs

Unhedged European equity ETFs remain the most popular and cost-effective option for investors seeking exposure to developed markets abroad.

Examples include the Vanguard FTSE Europe ETF

, iShares Core MSCI Europe ETF

IEUR

, and SPDR® Portfolio Europe ETF

SPEU

, which charge ultra-low expense ratios of 0.06%, 0.09%, and 0.07%, respectively.

These ETFs offer broad diversification across hundreds—or in some cases, thousands—of market cap-weighted European stocks. They’re an easy and inexpensive way to gain international exposure. But there’s one important caveat: they do nothing to hedge foreign exchange (FX) risk.

Because the underlying securities are primarily priced in euros, but the ETFs themselves trade in U.S. dollars, currency fluctuations directly affect performance.

When the U.S. dollar strengthens relative to the euro, it reduces the value of those euro-denominated holdings when translated back into dollars—causing the ETF’s price to lag, even if European stocks themselves are rising in local terms.

However, the reverse is also true. If the dollar weakens against the euro, these ETFs can enjoy a tailwind from currency translation.

But over the last decade, the U.S. dollar has mostly held strong—thanks in part to its role as the world’s reserve currency and its tendency to attract flight-to-safety capital during times of global stress.

Until that paradigm shifts, unhedged European ETFs may continue to face a performance headwind—even when the underlying equities perform well in local markets.

Hedged European equity ETFs

The alternative to unhedged exposure comes in the form of currency-hedged European equity ETFs, such as the WisdomTree Europe Hedged Equity Fund

and the Xtrackers MSCI Europe Hedged Equity ETF

DBEU

.

First, the cost. These funds are significantly more expensive than their unhedged counterparts. HEDJ carries an expense ratio of 0.58%, while DBEU charges 0.45%—several times the cost of ETFs like VGK, IEUR, or SPEU. They also differ in how they build their portfolios.

As expected from WisdomTree, HEDJ takes a fundamentally weighted approach, requiring that companies derive at least 50% of their revenue from exports outside Europe. Stocks are weighted based on cash dividends paid, with caps of 5% per stock, 25% per sector, and 25% per country. DBEU, by contrast, tracks a more traditional market-cap weighted index.

What both funds have in common is their currency hedge. They use derivatives—specifically forward contracts—to offset fluctuations between the euro and the U.S. dollar.

For example, DBEU’s benchmark, the MSCI Europe US Dollar Hedged Index, is 100% hedged to the U.S. dollar by selling each foreign currency forward at the one-month forward rate. That means for every euro of exposure, the fund enters a forward contract to sell euros and buy dollars one month out, resetting this hedge regularly.

Therefore, these ETFs won’t benefit if the dollar weakens, but they also avoid losses when the dollar strengthens. Over the past decade—an environment where the dollar has mostly been strong—hedged European equity ETFs have often outperformed their unhedged peers, simply by neutralizing a consistent headwind.

Which is better?

Looking at performance data from June 12, 2014 to March 31, 2025, currency-hedged ETFs like DBEU and HEDJ have significantly outperformed their unhedged counterparts—including VGK, IEUR, and SPEU—on both a total return and risk-adjusted basis.

That outperformance is still evident when analyzing rolling return periods, which help smooth out the impact of isolated market events and reduce the timing bias that can skew point-to-point comparisons.

As for the future, it really comes down to your view on the U.S. dollar’s strength and persistence as the global reserve currency. But from a portfolio construction standpoint, the more practical approach may be this: buy the stock, not the currency.

If I’m investing in European companies, I want my returns to come from the performance of those businesses—not from unpredictable swings in exchange rates that offer no expected compensation for the added risk over time.

Even though hedged ETFs cost more, I’m willing to accept the higher expense ratio in exchange for peace of mind. Currency-hedged products let me focus on the fundamentals of the market I’m targeting, without second-guessing whether gains or losses are being driven by the euro-dollar exchange rate.

In short, whether the U.S. dollar rises or falls, I’d rather not have that blur the outcome of my international equity exposure.

This article is for informational purposes only and does not in any way constitute investment advice. The author may express their own opinions, which may not represent the opinions of ETF Central or its affiliated partners. It is essential that you seek advice from a registered financial professional prior to making any investment decisions.