How Do Currency-Hedged ETFs Work? Inside the Mechanism That Lets You Invest in Shell, Toyota, and ASML Without the FX Guesswork

The Problem the Mechanism Is Designed to Solve

Before understanding how ADRhedged™ ETFs work, it helps to be clear about what problem they’re solving — because it’s one that most investors don’t fully see.

When a U.S. investor buys an American Depositary Receipt for a foreign company — say, Toyota Motor Corporation (TM), whose shares trade in Japanese yen on the Tokyo Stock Exchange — the ADR’s daily price movement in U.S. dollars reflects two things simultaneously: how Toyota’s yen-denominated shares moved, and how the yen moved against the dollar. Those two variables are completely independent of each other. Toyota can report record earnings and see its local shares rally while the yen weakens against the dollar, leaving the U.S. investor with a return that is materially lower than what Toyota shareholders in Japan received. The Toyota Motor Corporation ADRhedged™ (TMH) was designed specifically to eliminate that second variable for U.S. investors.

This is not a flaw in ADRs — it’s simply how they work. The same dynamic affects holders of ASML Holding (ASML), Novo Nordisk (NVO), and HSBC Holdings (HSBC) — with ADRhedged™ equivalents ASML Holding NV ADRhedged™ (ASMH), Novo Nordisk A/S ADRhedged™ (NVOH), and HSBC Holdings ADRhedged™ (HSBH) built to address each one. What all ADRhedged™ ETFs are designed to do is isolate the first variable (the company’s local equity performance) and neutralize the second (the currency movement) — so that the investor’s return tracks what the company actually did in its home market, not the compound result of the company plus a foreign exchange bet.

Step 1: The ADR Position

Each ADRhedged™ ETF begins with a straightforward foundation. Under normal circumstances, the fund invests at least 95% of its net assets in the American Depositary Receipt of the specific company it tracks. For the Toyota Motor Corporation ADRhedged™ (TMH), that means the fund holds Toyota’s ADR (TM). For the HSBC Holdings ADRhedged™ (HSBH), it means holding HSBC’s ADR (HSBC). For the Arm Holdings PLC ADRhedged™ (ARMH), it means holding Arm’s ADR (ARM).

This is fundamentally different from broad international ETFs that hold dozens or hundreds of companies and apply a currency hedge across the whole portfolio. Each ADRhedged™ ETF is a single-stock vehicle — it tracks one company, with one specific currency exposure. That precision is the point. An investor who wants Toyota doesn’t necessarily want or need a hedge on the euro, the pound, or the Swiss franc. They want a hedge on the yen — and only the yen — because that is the currency that Toyota’s business performance is priced in.

Step 2: The Currency Hedge Contract

The second component of each ADRhedged™ ETF is the Currency Hedge Contract — a derivative instrument, specifically a currency swap, that is designed to offset the day-to-day impact of exchange rate movements between the U.S. dollar and the relevant local currency.

Here is how the mechanism works in practice. Each trading day, the fund calculates the notional value of its currency exposure — essentially, the size of the foreign currency position embedded in the ADR it holds. It then enters into a currency swap contract that is structured to generate a gain if the local currency weakens against the dollar (offsetting the loss that would otherwise flow through the ADR) and a loss if the local currency strengthens against the dollar (offsetting the gain the unhedged ADR investor would have received).

The hedge is marked to market daily. That means the value of the Currency Hedge Contract is recalculated every trading day based on how the relevant currency pair moved, and the resulting adjustment flows through the fund’s net asset value. Over time, the cumulative effect of these daily adjustments is designed to bring the fund’s total return in line with what the underlying company’s local shares delivered — stripped of the currency component.

To use a simplified illustration: if Toyota’s yen-denominated shares rise 1% on a given day but the yen falls 0.5% against the dollar, an unhedged ADR investor would capture roughly 0.5%. An ADRhedged™ ETF investor, by contrast, would see their fund capture approximately 1% — because the Currency Hedge Contract generated a gain of approximately 0.5% that offsets the currency loss. The goal is precision: the company’s performance, in its local currency, delivered to a U.S. dollar-denominated account.⁶

⁶ This is a simplified illustration for educational purposes. Actual hedge performance will vary. Currency hedges are subject to imperfect matching, counterparty risk, and other factors that may cause actual returns to differ from the local market return. For detailed mechanics, see the fund’s prospectus at adrhedged.com.

How the ETF Structure Makes This Accessible

The Currency Hedge Contract that sits inside each ADRhedged™ ETF is the same type of institutional FX derivative that hedge funds and asset managers have used for decades to manage currency exposure in international portfolios. What the ETF wrapper does is make that instrument available to any investor who can buy a stock or ETF through a standard U.S. brokerage account.

Before ADRhedged™ ETFs existed, an individual investor who wanted to hold Toyota’s ADR with a yen hedge would have needed to separately enter into a foreign exchange forward or swap contract — a process that typically requires an institutional trading relationship, minimum notional amounts that are impractical for retail investors, margin or collateral requirements, and ongoing management of contract rollovers. The operational complexity alone made single-stock currency hedging effectively unavailable to most individuals and smaller advisors.

Each ADRhedged™ ETF trades on U.S. exchanges like any stock, settles through standard brokerage infrastructure, and carries a 0.19% annual expense ratio per fund. The currency hedge is embedded — investors don’t manage it, roll it, or monitor it. It runs continuously in the background, updated daily.

What “Hedging Daily” Actually Means

One nuance of ADRhedged™ ETFs worth understanding is that the hedge is applied on a daily basis rather than over a fixed forward period. This is a design choice with practical consequences.

A daily-reset hedge means the fund rehedges its notional currency exposure every day based on the prior day’s closing value. This ensures the hedge stays closely aligned with the fund’s actual portfolio value as it fluctuates — which matters because a hedge that is too large or too small relative to the actual portfolio value will over- or under-compensate for currency movements, creating tracking error. By recalibrating daily, the Currency Hedge Contract aims to maintain a close match between the hedge notional and the actual FX exposure in the portfolio at all times.

The tradeoff is that because the hedge resets each day, the relationship between the fund’s cumulative return and the cumulative return of the underlying local shares is calculated over rolling one-day periods rather than compounding directly over longer stretches. For long-term buy-and-hold investors, the effect is generally to closely track the local currency return of the underlying company over time, though exact replication is not guaranteed and short-term tracking differences will occur.

Who This Structure Is — and Isn’t — For

Understanding the mechanism helps clarify who benefits from ADRhedged™ ETFs and under what circumstances.

The strategy is most straightforward for investors who have a specific conviction about an international company — they want Arm Holdings (ARM) via the Arm Holdings PLC ADRhedged™ (ARMH) because they believe in Arm’s role in the AI and semiconductor ecosystem, or they want Novo Nordisk (NVO) via the Novo Nordisk A/S ADRhedged™ (NVOH) because they believe in the GLP-1 weight-loss drug market — but don’t want their investment outcome to hinge significantly on whether the pound or krone moves favorably against the dollar. The same logic applies across the full lineup: Shell (SHEL) via Shell ADRhedged™ (SHEH), SAP (SAP) via SAP SE ADRhedged™ (SAPH), GSK (GSK) via GSK plc ADRhedged™ (GSKH), BP (BP) via BP p.l.c. ADRhedged™ (BPH), and STMicroelectronics (STM) via STMicroelectronics NV ADRhedged™ (STHH). For all of these investors, ADRhedged™ ETFs let the company’s fundamentals drive the return.

The structure is less useful for investors who are indifferent between owning a company in its local currency or in dollars, or for investors who have a positive view on the foreign currency and want to capture potential tailwinds from currency appreciation alongside the equity return. In those scenarios, the standard unhedged ADR may better reflect the investor’s actual view. Because the hedge eliminates both the downside and the upside of currency movements, investors should think carefully about what they’re giving up alongside what they’re gaining.

It is also worth noting that each ADRhedged™ ETF is a single-company, non-diversified fund. Investors who want broad international equity exposure — across sectors, regions, and dozens of companies — will find that using multiple ADRhedged™ ETFs requires constructing a portfolio of individual funds rather than accessing a single diversified vehicle. The precision of the single-stock hedge comes with the concentration risk of single-stock exposure.

The Bottom Line on the Mechanics

ADRhedged™ ETFs do one thing that no other widely accessible retail investment product has done before: they give any investor in a standard brokerage account the ability to own a specific international company’s stock return — in that company’s local currency — without carrying an unmanaged currency position on top of it. The mechanism is institutional-grade FX hedging, embedded in an exchange-traded structure, at a 0.19% annual expense ratio.

Whether that mechanism adds value in any given year depends on how currency markets move. In years when the dollar is strong and foreign currencies weaken, hedged investors benefit relative to unhedged. In years when the dollar weakens and foreign currencies rise, unhedged investors capture a currency tailwind that hedged investors forego. Over the ten-year period ending February 2025, the hedged approach outperformed the unhedged approach by a cumulative 45% across the broad international equity universe — but past results don’t guarantee future outcomes.⁷

What ADRhedged™ ETFs offer is not a guaranteed improvement in returns. They offer a choice: to own the company’s equity performance, and only the company’s equity performance, without the foreign exchange variable — a choice that, until now, was largely unavailable to retail investors.

Investors considering ADRhedged™ ETFs should review the fund prospectus carefully, understand the hedge mechanism and its limitations, and consult with a qualified financial advisor to evaluate whether this approach fits their individual circumstances.

For standardized performance current to the most recent month-end, visit adrhedged.com or call (844) 954-5333.

⁷ Source: MSCI data, as of February 28, 2025. Past performance does not guarantee future results.

---

Disclosures

This article is sponsored content created in partnership with ADRhedged™ LLC. It is intended for informational and educational purposes only and does not constitute investment advice, a recommendation, or a solicitation to buy or sell any securities. Investors should consider their own financial situation, risk tolerance, and investment objectives before making any investment decisions. Investing involves risk, including the possible loss of principal.

Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call (844) 954-5333 or visit our website at www.adrhedged.com. Read the prospectus or summary prospectus carefully before investing. As with any investment, you could lose all or part of your investment in the Series, and the Series performance could trail that of other investments.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Performance current to the most recent month-end can be obtained by calling (844) 954-5333. Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns.

Market Risk. The prices of the securities in the Series are subject to the risk associated with investing in the stock market, including sudden and unpredictable drops in value. An investment in the Series may lose money.

Currency Hedging Risk. Because changes in foreign currency exchange rates affect the value of ADRs, the Series enters into the Currency Hedge Contract in order to seek to minimize the impact of fluctuations in the exchange rate between the U.S. dollar and the Local Currency. While this approach is designed to minimize the impact of currency fluctuations on Series returns, it does not necessarily eliminate the Series’ exposure to the Local Currency. Currency hedges are sometimes subject to imperfect matching between the Currency Hedge Contract and the currencies that the contract intends to hedge, and there can be no assurance that the Currency Hedge Contract will be effective.

Currency Swap Risk. The Currency Hedge Contract is subject to market risk, risk of default by the other party to the transaction (counterparty risk), and risk of imperfect correlation between profit or loss on the Currency Hedge Contract and the underlying currency exchange rate.

Issuer Concentration Risk. Because the Series only invests in the ADRs of the Company and the Currency Hedge Contract, the Series may be adversely affected by the performance of the Company, subject to increased price volatility and more susceptible to adverse economic, market, political or regulatory occurrences affecting the Company or industry.

Foreign Market Risk. Because non-U.S. exchanges may be open on days when the Series does not price its Shares, the value of the underlying securities of the ADRs in the Series portfolio may change on days when Shareholders will not be able to purchase or sell the Series Shares, regardless of whether there is an active U.S. market for Shares.

Non-Diversification Risk. The Series is non-diversified and holds Portfolio Securities of only one particular issuer. As a result, the Series may have greater volatility than other diversified funds.

Management Risk. The Series is subject to the risk that the Manager’s investment management strategy may not produce the intended results.

New Series Risk. As of the date of this prospectus, the Series has no operating history and currently has fewer assets than larger funds. Like other new funds, large inflows and outflows may impact the Series market exposure for limited periods of time.

Distributor: Foreside Fund Services, LLC.

For full fund details, prospectus, and holdings, visit adrhedged.com.