The main hedging costs are the costs of the currency forward contracts, which are not part of the TER. E.g. CHF-heding of USD currently costs 27.6 basis points for a month. That’s 3.36% p.a., roughly matching the interest rate difference. The expectation is that USD will depreciate 3.32% p.a., in which case the hedging cost will be fairly small. If USD depreciates more than that, you’ll profit from CHF-hedging. However, if USD depreciates less than that or even appreciates against the CHF, you lose the difference.
Thank you very much for this explanation - very appreciated!
Just for my understanding: That does mean that the net hedging costs would be 0.04% p.a. if everything would work out as expected (which of course will not be the case)?
I’m no expert on this, however, as I understand it, if the currency exchange rate exactly follows the market expectation on, e.g., a monthly basis, the hedging cost is the spread between the ask and mid prices of the FX forward contracts (+ commissions of the bank/broker but that might be part of the TER, not sure). That spread for a 1-month forward contracts is 0.5 bp according to the link above. That would be 0.06% p.a. This example also ignores the effect of stock market price changes (the hedged amount may no longer match the value of the stock a month later).
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