Why I'm Holding This Currency-Hedged International ETF

The numbers tell a clear story. In 2025, international equity ETFs powered ahead, with the MSCI ACWI ex-US index achieving a total return of 26.7% year-to-date. That performance gap was stark: it outpaced the S&P 500's 14.8% gain by more than a full percentage point per month. This wasn't just a currency play. For dollar-based investors, the U.S. dollar's 5.9% YTD drop provided a significant tailwind, boosting international returns by an estimated 9.3 percentage points. But the core driver was a fundamental bet against U.S. market concentration.

The S&P 500 has become a tech-heavy index, where the "Magnificent Seven" stocks make up about one-fourth of the index. This concentration creates a single-point vulnerability. In contrast, international markets like Europe's STOXX Europe 600 offer a more balanced structure, with its top 10 stocks making up only 17% of the index's market cap and spanning diverse sectors. The performance gap, therefore, reflects a structural shift in risk appetite. Investors are moving away from a portfolio where a handful of AI behemoths dictate returns and toward a more diversified global exposure.

This thesis is durable. It's not about chasing a temporary currency reversal or a fleeting valuation gap. It's about the inherent risk of over-reliance on a narrow set of companies. The evidence shows that when those tech leaders face overvaluation concerns and investor worries about payoffs, the entire index can feel the weight. International markets, by design, are less susceptible to that kind of single-stock drag. The bottom line is that 2025's outperformance was a powerful signal. It validated a long-term argument for diversification, framing the move not as a tactical currency trade but as a strategic reallocation away from concentrated tech risk and toward a more resilient global portfolio.

The Currency Hedge: Mitigating Volatility, Not Just Risk

Currency hedging is a tool for stability, not just risk reduction. Its core function is to eliminate the volatility of foreign currency exposure, allowing investors to capture the pure return of an underlying international asset. Historically, this has delivered superior risk-adjusted returns by locking in equity performance and removing a major source of portfolio noise.

The 2025 dollar decline provides a clear case study. The U.S. dollar's 5.9% YTD drop was a significant event, sparking investor anxiety and questioning the efficacy of hedges. For an unhedged investor, this weakness was a direct boost to returns, as foreign assets became cheaper in dollar terms. But this same volatility introduces a critical risk: currency mismatch. A hedge doesn't aim to profit from the dollar's fall; it locks in the equity return and removes this variable entirely. In practice, this means the hedged portfolio's performance is driven solely by the underlying stock market, not by the unpredictable swings of exchange rates.

This distinction is crucial for investors navigating a fragmented global order. For an Indian investor, the benefit is concrete. Suppose they hold a U.S. technology ETF. Without hedging, a 10% gain in the Nasdaq combined with a 5% depreciation of the rupee would amplify their return to roughly 15% in rupee terms. A currency hedge would lock in the 10% equity return, insulating the portfolio from the rupee's decline. The hedge provides a stable, predictable rupee-denominated return, which is the primary goal for many investors seeking to diversify without adding currency complexity.

The bottom line is that hedging is a strategic choice for clarity and consistency. It doesn't bet on currency direction; it removes that bet. In a world where regional blocs may use different currencies and volatility is likely to increase, the ability to isolate and capture pure equity performance becomes a valuable source of stability.

Valuation & Diversification: The Case for a Permanent Allocation

The case for international exposure is built on two pillars: valuation and diversification. The numbers offer a clear margin of safety. The iShares MSCI Eurozone ETF (EZU) trades at a P/E ratio of 17.68X, a significant discount to the Vanguard S&P 500 ETF VOO at 28.86X. This isn't a fleeting anomaly. The broader international landscape shows similar discounts, with the MSCI Emerging Markets ETF (EEM) at 15.54X and the iShares Japan ETF (EWJ) at 16.33X. This valuation gap provides a tangible buffer, especially when weighed against the concerns of tech concentration that have weighed on the U.S. market.

Diversification, as Warren Buffett noted, is protection against ignorance. The math is straightforward: a market-cap-weighted global portfolio would assign U.S. stocks a 49% share. For investors with a U.S.-centric bias, this suggests a fundamental need for international exposure to achieve a balanced risk profile. It's a bet against the extreme concentration of the U.S. market, where the "Magnificent Seven" tech giants make up a quarter of the S&P 500. In contrast, the Eurozone's STOXX Europe 600 has a more balanced structure, with its top ten stocks comprising only 17% of the index. This structural difference offers a different kind of risk management.

The primary risk to this allocation is a reversal in the dollar's decline. A stronger dollar would reduce the unhedged returns for U.S. investors, as seen in the past when foreign exchange has reduced returns over the long term. However, this is precisely why a permanent allocation strategy uses currency hedging. The hedge ensures the core equity exposure remains intact, insulating the portfolio from the volatility of currency moves. As the evidence shows, this approach has historically delivered superior risk-adjusted returns by minimizing volatility and capitalizing on interest rate differentials.

The bottom line is to frame this not as a tactical trade on a falling dollar, but as a permanent, structural reallocation. The valuation discount provides a foundation, the diversification offers a risk buffer, and the hedging strategy locks in the equity exposure. In a world where the dollar's share of reserves is slowly eroding, this approach builds a more resilient portfolio, one that is less dependent on the fortunes of a single, concentrated market.