25 July 2025

Currency risk is often ignored, but it can be a major driver of performance, especially for Swiss investors due to the long-term strength of the franc.
MSCI World Index currency exposure:

~97% of the index is in foreign currencies (USD ~71%, EUR ~12%, others ~14%)
Only ~3% CHF exposure

Hedging is not too expensive if done right:

Main cost: interest rate differential (e.g., USD-CHF ~4.5%)
FX spreads and fees can be minimized with the right custodian
ETFMandate uses a low-cost structure allowing efficient tactical hedging

Why most advisors don’t hedge:

Lack of tools, effort, or know-how
Push clients into static, costly hedged ETFs instead of dynamic solutions

Buy a hedged ETF? Often suboptimal:

Less flexible, higher fees, and wrong timing can harm performance

CHF: A strong safe-haven currency

Tends to rise in times of global stress, eroding returns from unhedged foreign assets

SNB cut rates to 0% on June 19, but CHF strengthened—safe-haven demand outweighs interest rate effects
My View: period of stronger CHF might continue with high number of uncertainties. Patterns of SNB intervention. Downside limited? In such a case hedges are going to be reduced or fully closed.

Bottom Line:
If you’re investing globally from Switzerland - portfolio in CHF base currency - and not managing currency risk, your portfolio may be underperforming silently.
At ETFMandate, active management of the FX exposure is part of the investment strategy, to preserve returns and reduce volatility.

My Portfolio: tactical decision to fully hedge of USD (since 14 January 2025) and EUR (since 6 March 2025) against the Swiss franc - The USD lost more than 13% since while the euro is down about 3% since I initiated the hedge.

For many investors, currency risk remains one of the most overlooked and underestimated elements of portfolio construction. Specially for Swiss investors this can be a key performance driver or performance drag as the Swiss franc has the tendency to appreciate against major currencies over the long run.

Despite its significant impact, particularly in globally diversified portfolios, FX risk is rarely a focus for banks or financial advisors.

In the ETFMandate portfolio, currency exposure is not a side topic. It’s a core component of both, my tactical and strategic decision-making, for good reason.

What most advisors don’t tell you and retail investors often ignore

Currency risk is often left out of the conversation for one reason: it complicates the narrative. Many advisors stick to the mantra of “diversify globally” without addressing the FX risk embedded in that strategy. Yet in reality, a strong franc can wipe out the benefits global diversification was supposed to bring, erasing much of the upside in foreign equities and bonds.

Why there is no offering

Many banks and advisors simply don’t offer currency hedging to a broad base of their clients. Not because it’s impossible, but because:

It requires additional infrastructure and effort
It’s outside their standardized product offerings
Advisors often lack the time and know-how, especially when it comes to dynamic or tactical hedging strategies
Some banks even make it technically difficult or overly costly to execute a hedge.
Many institutions charge excessive FX fees on every currency transaction, eating into returns.

Instead, they push their clients toward hedged ETFs or funds, which come with drawbacks: which come with their own drawbacks: higher costs, reduced flexibility, and blanket hedging that may work against you.

At ETFMandate, I typically avoid pre-hedged ETFs, except in very specific tactical situations.

Currency Exposure in the MSCI World Index

The MSCI World is the well known global equity index usually retail investor are investing in via an ETF.

Swiss investors buying the MSCI World Index via ETF are taking on significant foreign currency risk. Here’s the approximate breakdown:

USD: between 70 to 72% allocation
EUR: between 11 to 13% allocation
GBP, JPY and others: 14-16%
CHF: ~3%

Looking at this currency breakdown, there is approx. 3% left for the Swiss franc exposure. That means: 97% of your exposure lies in foreign currencies. This multi-currency-strategy should be definitely considered as a high level of risks in case not managed.

Is hedging too expensive? The excuse doesn’t hold

A frequently cited excuse, especially by professional investors and financial institutions, is that currency “hedging is too costly”. While hedging costs do matter, the real picture is more nuanced.

Yes, there are costs associated with hedging:

At the moment the most important factor to consider: The interest rate differential between currencies (known also as the “carry”). The Swiss interest rate is at 0% while the US interest rate is at 4.5%, resulting in a difference of 4.5% and at the same time the costs to take into account on a per annum bases. For the euro, is less expensive as the interest rate is at 2% at this stage.

FX spreads and fees, depending on your custodian, costs can vary dramatically
Operational complexity, why many advisors simply don’t want to bother.

But the real question is this: Do you expect the foreign currency to depreciate more than the carry costs? If yes, then hedging adds value, even after costs.

At ETFMandate, I’ve carefully selected a platform and custodian where a portfolio can be managed cost optimized that allows for: almost zero FX costs with transparent pricing and efficient execution of hedging overlays.

That gives me the flexibility to act decisively playing tactical hedges when needed with a foreseeable cost impact, let’s say almost negligible.

Tactical and strategic reasons to hedge

The Swiss franc has a long-term upward bias. A rising CHF can offset, even reverse gains from USD, EUR or any other foreign assets as well as commodities trading in USD. Properly timed hedging not only protects returns but also reduces volatility as FX fluctuations add another layer of risk.

I treat currency as an active portfolio position, not a passive outcome.

Buy the MSCI World Index ETF hedged?

The hedging mechanism for an ETF product is set-up quite efficiently. However, I do not advise to buy an ETF on hedged basis.

Why?

Hedging needs to be dynamic, not static
Hedged ETFs charge higher TERs
Blanket hedging reduces flexibility and may hurt performance when CHF weakens

Instead, I prefer selective, tactical hedging based on currency outlook, supported by portfolio-specific need (s. further below on both charts of the USD/CHF and EUR/CHF).

The Swiss Franc: Safe Haven with side effects

The Swiss franc (CHF) remains one of the world’s most sought-after safe-haven currencies. In times of uncertainty, rising geopolitical tensions, market volatility, or global slowdowns, the capital flows into the franc leading to higher demand. While such a case offers a certain stability for foreign investors investing in Swiss securities, it means for Swiss investors holding foreign currency exposure like EUR or USD, that it can introduce unanticipated volatility or erode returns when the franc appreciates.

Every period of global stress strengthens the franc, and weakens your foreign holdings unless you hedge.

Chart USD/CHF (2 Years)
as of 25 July 2025

Looking at the US dollar currency, the USD portion in the ETFMandate portfolio is quite substantial.

The USD/CHF was fully hedged between October to December 2023. Re-hedged again on 14 January 2025 at 0.9170. As of now, USD/CHF is at 0.7960, down over 13%.

Latest decision got mentioned in the Market Insights: Attempt to the rebound after inflation reading published on the same day.

Looking at the euro, the allocation in the ETFMandate portfolio is smaller compared to the US dollar portion, however, still substantial. The euro moved in a smaller price range during the last two years. That’s the reason why I let the currency fluctuate for a longer period.

However, on 6 March I decided to fully hedge the EUR/CHF at 0.9593 after a short spike of the euro related to German infrastructure stimulus talks and defense spending. EUR has since declined approx. 3% to 0.9340 (published back that day in the Market Insights: FOMO vs. Fear). Higher inflation expectations led to higher yields followed by a stronger euro.

Chart EUR/CHF (2 Years)
as of 25 July 2025

SNB policy: currency strength defies rate cuts

On 19 June, the Swiss National Bank (SNB) cut its key policy rate by 25 basis points (bps) to 0.0%, citing disinflationary pressures and weaker global economic momentum. While some expected this move to weaken the franc, the opposite happened.

Instead of depreciating, the Swiss franc continued to strengthen, against both the euro and the US dollar.

Why?

Switzerland’s low inflation and political stability
Rising global uncertainty fueling safe-haven demand
Negative real yields abroad making CHF more attractive

This environment reinforces the idea that interest rate differentials alone do not determine currency direction. For Swiss investors, the message is clear: even with ultra-low rates, the franc can, and often does, strengthen further.

Should this trend continue the possibility of a return to negative interest rates seems to be quite high.

My View

In my view, the Swiss franc strength is likely to persist. The SNB has limited tools to sustainably weaken the franc .
However, I see some patterns in the market charts, that it seems that the Swiss National Bank started to intervene, trying to weaken the Swiss franc or limit the upside by buying USD and EUR and selling the own currency. This could temper strength temporarily. But unless structural changes occur, a stronger CHF remains the base case:

Persistently low inflation and even some deflationary risks
Global geopolitical risks
Economic uncertainties and continued elevated volatility
Safe-haven status

That’s why the ETFMandate remains fully hedged on USD and EUR exposure, for now.

Should the Swiss franc continue to hover around current levels or if negative rates return, the case has to be monitored and newly valued together with the tactical currency view. The allocation could then be adapted in case of policy shifts. That said, with such a scenario I could imagine to partially or fully reduce the currency hedges.

Takeaway

If you invest globally from Switzerland in base currency CHF and do not actively manage major foreign FX part, you’re leaving a crucial risk unaddressed.

A part of the ETFMandate investment strategy is to integrate FX management form a tactical perspective. We do the work most advisors avoid or ignore. It’s not just about where you invest, it’s about how you manage the risks that come with it.

Currency risk matters. And it can be managed effectively, in case you have the right tools, structure, and expertise. ensuring your portfolio isn’t quietly losing ground to currency fluctuations.

ETFMandate Premium Members will be informed immediately in case my view and currency allocation in USD or EUR should change.

On ETFMandate Market Insights you can follow all updates regarding FX trends and policy shifts together with the overall positioning of ETFMandate portfolio.

Disclosure of shares or allocation in my portfolio specifically mentioned in this article (as of 25 July 2025:
Fully hedged the USD and EUR against the CHF

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