Every NZ investor in a global fund faces a currency question: do you want the NZD/USD (or NZD/EUR, NZD/JPY) exchange rate to affect your returns, or do you want to remove that variable?
This question has no universally right answer — but there are clear principles that help most NZ investors decide.
For most NZ investors with a long time horizon (10+ years), unhedged global funds are appropriate. Currency effects tend to average out over long periods, hedging costs money (~0.5–1% p.a. in NZ), and a weaker NZD — which is the historical trend — amplifies your global returns. For shorter horizons or retirees drawing down income, hedged funds reduce the risk of large swings from currency movements.
What Is Currency Hedging?
When you invest in an unhedged global fund, your returns are affected by two things:
- The performance of the underlying shares/bonds in their local currency
- The change in the NZD exchange rate against those currencies
Example: A US share rises 10% in USD. But if the NZD also rises 10% against the USD over the same period, your NZD-denominated return is approximately 0%. Currency gain cancelled out investment gain.
Currency hedging removes the exchange rate variable. The fund uses financial contracts (typically forward foreign exchange contracts) to lock in the exchange rate, so your NZD return matches the fund’s foreign-currency return more closely.
Hedged return ≈ foreign market return − hedging cost
Unhedged return ≈ foreign market return ± currency movement
The Hedging Cost
Hedging isn’t free. In NZ, the cost of hedging overseas currency exposure to NZD has typically been 0.5%–1.5% per year, depending on interest rate differentials between NZ and the countries being hedged.
When NZ interest rates are higher than US rates (which has often been the case), it’s expensive to hedge NZD/USD. When NZ rates are lower, hedging can actually provide a return.
As of mid-2026, with RBNZ rates having fallen significantly from 2023 peaks, hedging costs are lower than they were in 2022–2023 — but still a meaningful drag.
| Fund | Unhedged fee | Hedged fee | Hedging premium |
|---|---|---|---|
| Kernel Global 100 Fund | 0.25% | 0.28% | +0.03% stated; true cost higher |
| Foundation Series International | 0.20% | 0.23% | +0.03% stated |
The stated fee difference understates the actual hedging cost, which includes the implicit cost of the forward contracts. Check the fund’s quarterly reports for the effective hedging cost.
NZD Long-Term Trend: The Historical Case for Unhedged
The NZD has weakened against the USD over most 10+ year periods in history. When NZD weakens:
- Unhedged investors benefit (their USD/EUR/JPY holdings are worth more in NZD)
- Hedged investors miss this gain (they locked in the exchange rate)
Over the 20 years to 2025, unhedged global equity funds in NZ have generally outperformed their hedged equivalents — primarily because of NZD weakness amplifying USD gains.
Important caveat: This is not guaranteed to continue. NZD could strengthen. And short-term currency volatility can be dramatic regardless of long-term trends.
When Hedged Funds Make More Sense
Despite the long-term case for unhedged, hedged funds are better in some situations:
1. Shorter investment horizon
If you’re investing for 3–5 years, a large currency move could significantly affect your outcome. Hedging trades off long-term return potential for shorter-term stability.
2. Drawing down income from your portfolio
Retirees taking regular withdrawals are sensitive to the portfolio value in NZD at the time of each withdrawal. A 20% NZD appreciation can make the portfolio appear to drop 20% even if the underlying assets are performing well. Hedged funds smooth this out.
3. You’re already exposed to NZD weakness elsewhere
NZ property (your home) is a NZD asset. NZ shares in KiwiSaver are NZD assets. If you’re already meaningfully exposed to a NZD appreciation scenario through your overall net worth, adding unhedged global funds increases your overall currency exposure. Some hedging in the fund portfolio can balance this.
4. You’ll panic if you see currency-driven volatility
Unhedged funds can appear to swing significantly more than the underlying market — purely due to currency. If you’d sell during a 10% currency-driven drawdown, hedging removes that trigger.
Hedged vs Unhedged: Real Performance Example
In 2022:
- S&P 500 fell ~18% in USD
- NZD/USD fell from 0.68 to 0.57 (~16% NZD depreciation)
Unhedged result (NZD): S&P 500 in NZD fell only ~2–3% — the weaker NZD offset most of the USD loss
Hedged result (NZD): S&P 500 in NZD fell ~18% — locked in at the old exchange rate, full USD loss
This illustrates the two-edged nature of hedging: in a bad year for both markets and NZD, unhedged investors were protected. In a bad year for markets but good year for NZD, the opposite would apply.
Available Hedged and Unhedged Options in NZ
| Fund | Platform | Hedged? | Fee |
|---|---|---|---|
| Kernel Global 100 Fund | Kernel | ❌ Unhedged | 0.25% |
| Kernel Hedged Global 100 Fund | Kernel | ✅ Hedged | 0.28% |
| Foundation Series International Shares | InvestNow | ❌ Unhedged | 0.20% |
| Foundation Series International Shares (Hedged) | InvestNow | ✅ Hedged | 0.23% |
| Smartshares US 500 ETF (USF) | NZX | ❌ Unhedged | 0.34% |
| Smartshares Total World Fund (TWF) | NZX | ❌ Unhedged | 0.20% |
Most NZ fund providers offer both. You can choose per fund, or hold both (some investors split 50/50 between hedged and unhedged — effectively taking a partial currency position).
Practical Decision Framework
| Situation | Recommendation |
|---|---|
| 20+ year horizon, under 50 | Unhedged |
| 10–20 year horizon | Mostly unhedged (80/20 or 70/30) |
| 5–10 year horizon | Consider 50/50 split |
| Under 5 years | Hedged (or conservative/bond-heavy fund) |
| Retiree drawing down | Hedged component in drawdown assets |
| Already owns NZ property | Slight lean to unhedged for diversification |
Frequently Asked Questions
Does KiwiSaver use hedged or unhedged funds? Most KiwiSaver balanced and growth funds have a mix. Check your provider’s fund factsheet — it should specify the strategic hedging policy. Milford, Fisher Funds, and others typically hedge 50–70% of overseas currency exposure in their growth funds.
Will the hedging cost always be a drag? No. When NZ interest rates fall below overseas rates, hedging can actually provide a positive return (the interest rate differential flows in your favour). It’s not always a cost — it depends on relative interest rates.
Should I switch my existing unhedged fund to hedged? If you’ve held it for years and your situation hasn’t changed, probably not — switching creates a tax event (you’re selling units) and disrupts compounding. Review at account-opening or when making new contributions.