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Market Update

Currency Hedging: Fine for Bonds, Not for Stocks

The currency headwinds for unhedged equity exposure won't continue forever.

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The question of whether to hedge currency exposure is one of the longer-running debates in investing circles. Some argue that currencies are part of the opportunity set and therefore one should leave currency unhedged, as it promotes diversification. But others see currency movements as too idiosyncratic to manage. To them, it makes more sense to hedge that risk away.

Here’s my take: Leave your foreign equity holdings unhedged but consider hedging your bond stake. In the rest of this piece, I’ll explain my rationale and the role risk tolerance can play in deciding whether to hedge or not.

Amy C. Arnott does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.