In recent weeks, several international equity indices have reached new all-time highs, and the economic turbulence caused by Donald Trump’s trade policy interventions was surprisingly quickly absorbed by the markets. Nevertheless, Swiss investors in U.S. equities have suffered losses this year—not because of declining share markets, but due to the significant weakening of the U.S. dollar. By historical standards, the U.S. currency has experienced a marked correction.
Many investors still recall January 2015, when the Swiss National Bank removed the franc’s floor against the euro, causing a sudden appreciation of the franc and booking losses exceeding 10 % on foreign-currency investments. That event left a lasting impact on awareness of currency risk.
Since then, hedging foreign-currency bonds has become standard practice. The reason is obvious: bonds are meant to provide stability in the portfolio and cushion equity market downturns. Because bond price fluctuations are significantly smaller than those of currencies, unhedged currency risk can undermine their role as a stabilising anchor. From a risk-perspective, currency hedging is therefore essential to preserving the defensive character of these investments.
On the equity side, the situation is more nuanced. Although currency hedging is increasingly important for institutional investors, no general consensus has yet been reached. Many argue that exchange-rate losses are offset over the long term by equity price gains, and that the additional risk-reduction benefit is limited. Furthermore, the cost of hedging raises the question of whether the expense is justified by the potential benefit.
Thus, the decision on currency hedging for equities is more complex and cannot be resolved purely through portfolio theory. As always, where theory offers no clear guidance, we must turn to empirical data. In the following, we examine whether — from the perspective of a Swiss-franc investor — it has historically been more advantageous to hedge USD exposure, or whether unhedged foreign-equity investing has delivered higher returns.
First, we look at the performance of the USD against a basket of currencies to contextualise the recent depreciation. Then we review the cost of hedging currency risk. Finally, we perform an empirical analysis of global equity investments from the perspective of a CHF investor, comparing returns in global equity markets with and without currency hedging.
Chart 1 shows the long-term development of the USD exchange rate against a basket of EUR, JPY, CAD, GBP, CHF and SEK since 2006. There was a phase of USD depreciation until 2012, followed by a recovery until 2022. Since then, the USD has depreciated again — especially in 2025 after liberation day. The USD’s performance in 2025 is comparable to its weakest since 1973. In contrast, the USD has continuously weakened against the CHF. When examining these movements, one should more accurately speak of Swiss-franc strength rather than merely U.S.-dollar weakness.
The cost of hedging USD versus CHF or EUR currently stands at around 4% for the CHF. The costs derive from the interest-rate differential: the USD interest rates are above 4%, whereas CHF interest rates remain around 0%. In a currency hedge, the foreign currency is sold forward; the forward rate is set today and implicitly includes the (anticipated) interest-rate difference — otherwise a risk-free profit could be realised.
The discount implied by the interest-rate differential compared to the spot exchange rate constitutes the hedging cost. Larger interest-rate differentials between two currency zones result in larger forward discounts and thus higher hedging costs.
For our empirical results: to assess whether, over the last ten years, it would have been worthwhile to invest in global equities on a hedged basis, we conducted the following analysis.
We compared the performance of two ETFs, identical except for currency hedging:
Although the USD has depreciated by -19.5% versus the CHF over the last decade, the CHF-hedged version underperformed the USD version by approximately -14%. The hedging cost simply proved too large. In the shorter term, hedging currency risk may be worthwhile — but doing so requires the ability to forecast USD exchange-rate movements over the next 1–3 years, which is extremely difficult.
In summary, currency hedging for equities is not advisable. Empirical evidence shows that over extended periods, hedging costs are too high and outweigh the advantages of avoiding currency losses. The reason can be summarised with the simple phrase “there is no free lunch.” Given that the typical private investor cannot personally implement currency hedges, they must rely on product providers or banks. These providers incorporate their costs and profit margins into the service or fund. Because FX markets are highly efficient and interest-rate differentials are fairly priced, funds/ETFs offering currency hedging bear higher costs, as they also include the margin of FX-traders. This leads to inferior performance for systematically hedged currency segments over the long term.