The hidden currency risk in global investing: what advisors need to know

As financial advisors, you’ve long understood the value of international diversification. Exposure to global markets can help investors tap into growth opportunities beyond US borders. Model portfolio solutions and large institutions like Vanguard recommend an allocation of 20 percent to international exposure. While diversification and growth potential ex-US are additive, the industry of professional financial advice has long overlooked a crucial risk factor: currency exchange fluctuations.

US investors hold roughly $1 trillion in international stocks through American Depository Receipts (ADRs), yet most don’t realize that their returns are tied not only to company performance but also to the relative performance of the local currency to the US dollar. As an advisor and steward of capital, if you’re not thinking about currency risk and its impact on international investments, now is the time.

Why currency risk matters now

When investors purchase international stocks, whether through mutual funds, ETFs, or ADRs, they naturally expect to get the full performance of the underlying company. In reality, a US investor holding European stocks in US dollars is making two bets: one on the company and another on the underlying currency’s strength relative to the dollar, which can have profound effects on returns (positive or negative). In the case of a strong US dollar, investors should expect their ADRs to underperform the local shares of the company.

Given the recently outlined pro-growth policies of the new administration, America appears on track for continued strength in the US dollar. The Trump Administration’s newly imposed tariffs on imported goods from overseas trading partners are adding further momentum to the already strong dollar. As tariffs make imports more expensive, demand for US dollars rises, pushing its value higher. Equally important is the potential impact for the Federal Reserve to raise rates should inflation continue to be problematic. This, in turn, can push the dollar upwards as foreign investors seek higher returns.

Historically, since most investors had no way to hedge currency exposure, they were forced to ignore currency fluctuations, hoping that ups and downs would even out over time. Unfortunately, hope is not a viable long-term strategy, and the sustained strength of the dollar and policy-driven volatility appear to make that assumption increasingly unlikely.

The importance of mitigating currency risk

Currency risk has been rearing its head for years now, but it can be addressed through currency hedging. Looking at empirical data between the MSCI ACWI ex USA Index and The MSCI ACWI ex US 100% Hedged against the USD Index, the currency-hedged index outperformed the unhedged version by approximately 2.42 percent on an annualized basis, from January 2015 to February 2025, a cumulative outperformance of nearly 45 percent.

This risk is particularly pronounced for investors with large international allocations who may not actively monitor currency movements.

For financial advisors, managing international exposure isn’t just about asset allocation, it’s about ensuring clients get the intended benefits of global diversification without sacrificing performance. By proactively assessing and managing this risk, advisors can help clients navigate global markets with greater confidence and stability.

There are various ways to reduce the impact of currency swings. Whether through portfolio-level hedging techniques or investment vehicles designed to mitigate foreign exchange volatility, managing currency risk allows investors to focus on equity performance without unexpected disruptions. The recent introduction of ADRhedged ETFs also gives investors access to the largest, most liquid global equities with built-in currency hedging, in a single security.

As global markets continue to evolve, advisors who proactively integrate currency considerations into their investment strategies will be better positioned to mitigate the associated risk in their clients’ portfolios. Understanding and managing this risk is no longer optional: it’s essential to making informed, strategic international investment decisions.