What the dollar is doing.
or, why a great year in dollars can be a bad year in euros
Where it shows up
Most popular ETFs in Europe are denominated in euros but hold dollar assets underneath. The fund quietly absorbs the between the asset's currency and yours. Your monthly statement only shows the final number in euros. That number is the asset's price moves *and* the moves, mashed together. Most years, the FX part is a few percentage points either way; in extreme years, it can be the whole story.
Hedged or unhedged?
A ETF strips the FX out: the fund buys forward contracts that lock in today's exchange rate, so what you get is the asset's performance in its local currency. The cost is a slightly higher TER (typically +0.10% to +0.20%) plus a small 'carry' tied to the interest-rate differential between the two currencies. When US rates are well above European rates (as in 2023–24), hedging USD assets back to EUR has a real running cost.
Does it average out?
Across decades and a globally diversified portfolio, FX effects are roughly mean-reverting: dollar strength in one decade tends to fade in the next, and the noise washes out. Across short horizons (3–10 years) and concentrated bets (S&P-only, Nasdaq-only), FX can dominate the entire return. The longer your horizon and the more global your basket, the less hedging matters.
Bonds: hedge. Stocks: usually don't.
The Vanguard rule of thumb most academics agree with: hedge the foreign , don't hedge the foreign equities. Bond returns are small and FX swings can swallow them whole, so removing the FX makes the asset behave like a bond should. Equity returns are large and long-term mean-reverting against currencies, so paying every year to remove a wash is a slow drag. For a held 20+ years, unhedged is usually the right default.