Executive Summary: Vanguard hedges currency risk in its bond funds—and for good reason. Over 35 years, hedging has delivered smoother, more stable returns. This piece breaks down why currency risk doesn’t belong in your bond allocation.
Foreign currencies: To hedge or not to hedge? That is the question.
At least, it would be if Hamlet managed a global portfolio and had a Bloomberg terminal. And while Vanguard often prides itself on offering investors choice, this is one area where it plants its flag.
In Vanguard’s bond funds, foreign currencies are consistently hedged back to the dollar, meaning they are taking virtually all of the risk that currency markets will move against investors out of the portfolio.
By contrast, its foreign stock funds are—for better or worse—fully exposed to currency moves. (Yes, there are exceptions, but they prove the rule. I’ll get to that later.)
As I gear up to evaluate Vanguard’s lineup of foreign and global stock funds in the weeks ahead, I want to step back and tackle a foundational question: When does it make sense to hedge against currency fluctuations?
If you can pick the right international stocks (or bonds) and correctly nail the currency call, you can supercharge your returns. But predicting currency moves is no easier than timing the stock or bond markets.
I’m self-aware enough to admit I don’t have that edge—and I haven’t met anyone who does. So, I’m going to approach this question from the perspective of a long-term, strategic investor.