Currency-hedged or unhedged: what the dollar does to your savings

You opened a comparison site and put two funds side by side, both tracking exactly the same American index. Same index, same companies, same direction. Yet on the line for "return over the last year, in shekels", there is a gap of several percentage points that fits nothing you understand. Next to one of them it says "currency neutralised" (מנוטרלת מט"ח). You are not sure what that means, let alone whether it is good.

The first conclusion is that one of them is "better" and you just need to work out which. The second is quieter: "we don't understand investing". From there come the familiar fixes: pick whichever rose more last year, or try to guess where the shekel is heading.

There is a part of you that says "this is too complicated", and it is not entirely wrong: this is one more layer, and nobody asked for it. "Too complicated" also excuses you from having to understand, and that way you protect your time and your head. And there is a part of you that simply wants to know what you hold, so the next statement does not come as a surprise. For both of them, this article settles for three questions.

Two exposures in one asset

This is not a failure of one of the funds, and it is not a gap in your understanding. It is a layer the fund's name does not tell you about. The headlines report in dollars, your statement reports in shekels, and nobody explains the bridge.

Whoever holds an asset abroad holds two things: the asset, and the currency it is measured in. When an American index rises, it rises in dollars. To know what happened to you in shekels, you also have to ask what the dollar did against the shekel over the same period. Roughly, your return in shekels is the asset's return in dollars, plus or minus the change in the exchange rate.

A hedged fund, or "currency neutralised" fund, removes most of that second layer. Instead of letting the exchange rate move the result, it pays a hedging cost, and the shekel result stays closer to the asset's own return. That cost changes over time and depends, among other things, on the gap between interest rates in Israel and in the United States. When Israeli rates exceed American ones, it can even favour the hedged fund. The Israel Securities Authority's investor information explains currency-neutralised funds.

An example in round numbers

The numbers below are invented and deliberately round, there only to show the mechanism. They are not historical data, not a forecast, and say nothing about next year. Suppose the asset rose 10% in dollars, and the cost of hedging, for this example only, is 1% a year.

Example only: the same asset, a moving exchange rate

Aspect	Unhedged	Hedged
The asset in dollars	Up 10%	Up 10%
If the dollar weakens 5% against the shekel	About 4.5% in shekels	About 9% in shekels
If the dollar strengthens 5% against the shekel	About 15.5% in shekels	About 9% in shekels
What it gives you	Gains when the dollar strengthens, loses when it weakens	A result close to the asset itself, whichever way the rate moves
What it costs	Extra swings on the statement	The hedging cost, even in a year when it was not needed

UnhedgedHedged

Unhedged

The asset in dollars

Up 10%

If the dollar weakens 5% against the shekel

About 4.5% in shekels

If the dollar strengthens 5% against the shekel

About 15.5% in shekels

What it gives you

Gains when the dollar strengthens, loses when it weakens

What it costs

Extra swings on the statement

Notice what the example does not say: it does not say either one is better. Each reacts differently to the same world. Hedging is neither an upgrade nor a mistake. It is a choice, with a price.

That is also the gap from the opening. The two funds on the same index were not managed better or worse than each other; in a year when the exchange rate moved, one felt it and the other barely did. In a year when the rate moves the other way, the order in the table can flip without anything in the management changing. Picking by last year's line is really picking by what the dollar did.

Also worth knowing: in many long-term savings tracks, part of the money is invested abroad, even if you never chose an "American fund". The exact share in your track is in its investment policy. So this question can touch a household that has never bought an ETF.

Shekel versus dollar returns: what to know by the weekend

To know, for every account in the household, how much of it is exposed to the dollar and other currencies, and whether that exposure is hedged. One small table, one evening. Without guessing the shekel's direction, without changing a track or a fund because of one quarter, and without becoming currency experts. What people describe once the table is full is that the statement stops surprising them. Whether to change anything is your decision.

Three questions about foreign currency exposure, for each account

Choosing a track, transferring, or withdrawing from a pension fund, a kupat gemel (קופת גמל, a long-term savings fund) or a keren hishtalmut counts as pension advice under Israeli law when it is given to a specific person. This article describes how the instruments work, and a licensed pension adviser can look at your own case.

Question 1: how much of it is exposed to foreign currency

In gemel, hishtalmut and pension funds, foreign currency exposure appears in the track's investment policy and its reports. On Gemel-Net and Pension-Net, the Capital Market Authority's public tools, you can find the track and its details. Not sure which track you are in? See the article on investment tracks. For a mutual fund or an ETF, it is usually in the name itself and in the fund's documents.

Question 2: is the exposure hedged, and how much of it

Hedging can be full, partial or absent. In long-term tracks it is usually written as a policy, sometimes as a range. Why both a local index fund and a foreign-listed ETF carry dollar exposure is covered in the article on an S&P 500 fund versus an Irish ETF.

Question 3: what to compare it against

An index in the same currency your statement is measured in. A statement in shekels set against a headline in dollars will look strange in every quarter the exchange rate moves.

And what do people weigh when they think about hedging? Three things come up. The horizon, because over many years currency swings behave differently than over a quarter. Future spending, in shekels or in foreign currency, because someone who will live in shekels and someone planning to live abroad are asking different questions. And the cost. Whether to change anything at all is your decision.

This week's table, for each account

• Account and track name
• Share of foreign currency exposure, per the track's policy
• Hedged: yes, partly, no, or don't know
• Which index, in which currency, to read the statement against
• Every "don't know" became a written question to the provider

0 of 5 done

In AlphaHome: household net worth is shown in shekels, using the Bank of Israel representative rate to convert from dollars. The pension page brings together the balances as you typed them from the statements, and each account has a free-text track field, where you can also write "hedged" or "unhedged" next to the name.

The shekel moved, the statement jumped: when you want to hedge everything

The shekel strengthened, the statement dropped, and you want to hedge everything. Wanting the quarter's pain to stop is entirely understandable. Today: write the question down next to the account's horizon. What people in this position describe is checking it against the horizon rather than the quarter, sometimes with a licensed pension adviser; the decision is yours. Next time: read the statement against an index in the same currency, not against a dollar headline.

You could not find the exposure anywhere. "too complicated" is back, and this time it has a simple answer. Today: one written question to the provider, "What is the foreign currency exposure in my track, and how much of it is hedged?" Next time: add the currency column to the table on the day you join a new track.

A headline says the shekel "must" move one way. Nobody knows where the exchange rate is going, this article included. Today: go back to the table, not the headline. What you chose, you chose because of your horizon. Next time: one line per account on why you chose it.

A shekel statement in a dollar world

Whoever compares a statement in shekels with a headline in dollars will be surprised again every quarter. Whoever knows which part of their savings is measured in dollars, and whether it is hedged, reads the same statement calmly. And the two funds from the opening are no longer a puzzle: one chose to pay for calm against the exchange rate, the other chose to carry it.

This week: a small table on paper, with account, foreign currency exposure per the track's policy, and hedged yes, partly, no, or don't know. Every "don't know" becomes a written question to the provider.