Vanguard presents a framework for making currency hedging decisions at the total portfolio level rather than by asset class, arguing that investor objectives and strategic allocation should drive outcomes. It challenges the common building block approach, noting currency adds volatility without intrinsic return and that hedging benefits are often modest.
The Portfolio Currency-Hedging Decision, by Objective and Block by Block
Vanguard
Daren Roberts
Research
22 Pages
Key Takeaways
Portfolio First Approach: Strategic asset allocation drives over 90% of portfolio return variability, making currency hedging a secondary decision tied to overall objectives rather than isolated asset class choices.
Currency Adds Volatility: Currency exposure contributes 100% of its impact through volatility, not return, increasing short term fluctuations without improving long term expected performance.
Hedging Benefits Limited: Hedging can reduce volatility by up to 50% in fixed income allocations, but shows far weaker and inconsistent impact in equities depending on correlations and market conditions.
Join our newsletter to have all of this content + Exclusive Newsletter Bonus Content delivered to your inbox every week
Related Content
