Currency hedged ETFs have been the better choice for US investors in the most recent twelve month period, but not in every year. In the year to June 30, 2026, the iShares Currency Hedged MSCI EAFE ETF (HEFA) returned 28.14% at NAV against 20.11% for the unhedged iShares MSCI EAFE ETF (EFA), and the hedged Japan fund (HEWJ) returned 51.46% against 29.89% for EWJ [2][3][4][5]. In calendar 2025, when the dollar weakened, the unhedged EAFE fund won by more than 8 points [2][3]. The deciding factor is the path of the dollar, while the cost of hedging, driven by interest rate gaps, has actually favored US based hedgers in 2026 [6].
How currency hedged ETFs work
An unhedged international fund such as EFA owns foreign shares priced in euros, yen, pounds and francs. A US investor earns the local stock return plus or minus the change in those currencies against the dollar. A hedged fund removes most of the currency effect. HEFA, for example, holds shares of EFA (100.19% of assets on June 30, 2026) and sells forward contracts on the euro, yen, franc, Australian dollar, pound and krona against the dollar [2]. When a foreign currency falls, the forwards gain and offset the loss; when it rises, the forwards lose and offset the gain.
What hedging costs in 2026
There are two costs. The first is the fee. HEFA's net expense ratio is 0.35% against 0.32% for EFA, after a 0.35 point fee waiver that runs through November 29, 2030; HEWJ and EWJ both charge 0.49% net [2][3][4][5]. The second is the carry on the forwards, which roughly equals the interest rate gap between the two currencies. When US rates are higher than foreign rates, selling a foreign currency forward locks in a small gain rather than a cost.
As of September 4, 2026, the Fed's policy rate midpoint was 3.625%, against 2.25% at the ECB, 1.00% at the Bank of Japan, 0% at the Swiss National Bank, 3.75% at the Bank of England and 4.35% at the Reserve Bank of Australia [6]. That gives the following approximate annual carry for a US investor who hedges:
- Yen: a gain of about 2.6 points a year, since US rates exceed Japanese rates by 2.625 points [6].
- Swiss franc: a gain of about 3.6 points [6].
- Euro: a gain of about 1.4 points [6].
- Pound: roughly neutral, a cost of about 0.1 point [6].
- Australian dollar: a cost of about 0.7 point [6].
These are estimates from policy rates, not the exact forward pricing a fund pays, but they show why hedging developed market equity exposure has been cheap, and often profitable, for US investors in 2026.
Hedged vs unhedged international ETFs: the issuer data
The table compares annualized NAV returns from the June 30, 2026 iShares fact sheets, along with three year standard deviation, a measure of volatility [2][3][4][5].
| Fund | 1 year | 5 years | 10 years | 2025 | Std. dev. (3y) |
|---|---|---|---|---|---|
| HEFA (EAFE, hedged) | 28.14% | 13.92% | 12.71% | 23.25% | 8.62% |
| EFA (EAFE, unhedged) | 20.11% | 9.11% | 9.68% | 31.38% | 12.82% |
| HEWJ (Japan, hedged) | 51.46% | 22.06% | 17.27% | 30.08% | 11.64% |
| EWJ (Japan, unhedged) | 29.89% | 9.33% | 9.54% | 25.92% | 13.32% |
Three patterns stand out. First, the hedged EAFE fund beat the unhedged one in four of the five calendar years from 2021 to 2025, with the exception of 2025, when EFA returned 31.38% against 23.25% [2][3]. Second, the hedged Japan fund beat EWJ in all five years, including a gap of 18.07 points in 2024 (24.87% against 6.80%) [4][5]. Third, hedging cut volatility: HEFA's three year standard deviation was 8.62% against 12.82% for EFA [2][3].
Why the yen made hedging pay in 2026
The large Japan gap has a simple cause. On DataPorium's daily data, USD/JPY rose from 143.98 on June 30, 2025 to 162.52 on June 30, 2026, so the yen lost about 11.4% of its value against the dollar over the period the fact sheets cover [1]. An unhedged US investor in EWJ gave back that amount; the hedged investor did not, and also collected the rate gap between the dollar and the yen [1][5][6].
The trend has not continued in a straight line. From June 30 to September 4, 2026, USD/JPY fell to 156.20, a yen gain of about 4.0%, which favors unhedged holders over that stretch [1]. Other currencies moved less: on September 4 GBP/USD was about 1.352, close to its level at the end of 2025, while USD/CHF had risen to 0.810 from 0.793, a franc decline of about 2.1% [1]. Investors can track these pairs on DataPorium's forex page.
How investors may think about hedging international ETFs
A hedged fund is a bet on neither the dollar nor foreign currencies; it narrows the outcome to the local stock return plus the rate carry. That suits investors who want foreign equity exposure without currency swings, and it has been rewarded while US rates stay above those in Japan, Switzerland and the euro area. The counterpoint is that currency exposure can diversify a US portfolio: in years like 2025, when the dollar falls, unhedged holdings add return just when US assets may be under pressure. Some investors split the difference by hedging part of the position. The choice rests on each investor's time horizon and view of the dollar, not on a rule.
Currency hedging added 8 points for EAFE and more than 21 points for Japan in the year to June 30, 2026, but it trailed in 2025 when the dollar fell, so the result depends on the dollar more than on cost.
Key takeaways
- In the year to June 30, 2026, HEFA returned 28.14% against 20.11% for EFA, and HEWJ 51.46% against 29.89% for EWJ [2][3][4][5].
- In calendar 2025, unhedged EFA returned 31.38% against 23.25% for hedged HEFA [2][3].
- With US rates above those in Japan, Switzerland and the euro area, hedging those currencies earned carry rather than costing money in 2026 [6].
- The yen fell about 11.4% against the dollar from June 2025 to June 2026 but recovered about 4.0% by September 4, 2026 [1].
Frequently asked questions
Are currency hedged ETFs worth it in 2026?
They have been over the past year: through June 30, 2026, the hedged EAFE and Japan funds from iShares beat their unhedged versions by about 8 and 22 points, but hedging lagged in 2025 when the dollar weakened [2][3][4][5].
How much does currency hedging cost?
The fee difference is small, 0.35% for HEFA against 0.32% for EFA, and the forward carry in 2026 has been a gain for US investors hedging the yen, franc and euro because US rates are higher [2][3][6].
What is the difference between HEFA and EFA?
EFA owns developed market stocks outside the US and Canada with full currency exposure, while HEFA holds EFA and sells currency forwards to remove most of the effect of exchange rate changes on returns [2][3].
Why did hedged Japan ETFs do so well?
The yen fell from about 144 to about 163 per dollar between June 30, 2025 and June 30, 2026, so hedged funds such as HEWJ kept the Japanese stock gains that unhedged holders partly lost [1][4][5].
Sources & References
- [1] DataPorium Forex: daily USD/JPY, USD/GBP and USD/CHF exchange rates
- [2] iShares Currency Hedged MSCI EAFE ETF (HEFA) fact sheet as of June 30, 2026
- [3] iShares MSCI EAFE ETF (EFA) fact sheet as of June 30, 2026
- [4] iShares Currency Hedged MSCI Japan ETF (HEWJ) fact sheet as of June 30, 2026
- [5] iShares MSCI Japan ETF (EWJ) fact sheet as of June 30, 2026
- [6] BIS: Central bank policy rates (WS_CBPOL), daily, September 1 to 4, 2026
