Portfolio a alokace
Currency Diversification in a Portfolio for Czech Investors
Key takeaways
- Global equity ETFs bought in CZK still hold assets in USD, EUR, and other currencies — so you have natural currency diversification.
- Currency-hedged ETFs tend to be more expensive and are not always worth it for long-term investors.
- A strengthening koruna reduces the value of foreign assets expressed in CZK — and vice versa.
- Over a long horizon, currency risk isn't necessarily an enemy; exchange rates fluctuate in both directions.
Currency diversification for a Czech investor happens naturally as soon as they buy a global ETF — because the underlying assets are denominated in foreign currencies. The question is whether and how to consciously manage this risk.
How Currency Risk Works
If you buy a global equity ETF in EUR or CZK, the underlying stocks are still denominated in USD, JPY, GBP, and other currencies. If the koruna strengthens against the dollar by 5%, the value of your portfolio in CZK falls — even if the stocks themselves haven't moved. Conversely, a weakening CZK inflates your return history in koruna terms.
Hedging: When Yes and When No
There are ETFs with CZK or EUR hedging (so-called hedged share classes). However, they carry higher TER and the hedging itself generates costs dependent on the interest rate differential. For investors with a 10+ year horizon, hedging therefore typically adds no value — currency movements average out over time. Hedging makes more sense for:
- short horizons (under 5 years),
- bond allocations, where asset volatility is lower and the currency effect is relatively larger,
- large lump sums where you can't afford to time things badly.
Practical Allocation for a Czech Investor
Many Czech investors naturally hold part of their savings in CZK (savings accounts, bonds, real estate). This in itself forms a "currency hedge" for that portion of the portfolio. The equity component can then be unhedged — spread across USD, EUR, JPY through a global index.
What to Do
For most Czech investors, a sensible strategy is: global equity ETFs without hedging, and a CZK liquid reserve for short-term needs. Read more about fund selection in UCITS ETFs with Irish domicile or the comparison of All-World vs. S&P 500.
FAQ
Do I need to worry about currency risk when investing in ETFs?
With a long horizon (10+ years), generally not. Currency movements average out over time and hedging costs money. It makes more sense for short horizons or the bond component of a portfolio, where asset volatility is low and the currency effect is relatively larger.
What is a hedged ETF share class?
An ETF with currency hedging that uses forward contracts to neutralise exchange rate movements against a specific currency (e.g. EUR or CZK). It carries higher fees, and hedging costs depend on the interest rate differential.
How does the koruna affect my EUR-denominated ETF?
When the koruna strengthens against the euro, the value of euro-denominated assets expressed in CZK falls — even though the fund itself lost nothing. A weakening CZK, conversely, inflates returns in koruna terms. Over a long horizon, these effects alternate.