ETF Currency Risk

EnglishMohican

I would like to be sure I have understood how the following works correctly.

If I buy an ETF which has a base currency of US dollars but can be purchased on the LSE in pounds, do I carry the risk/get the benefit of currency variations? In other words, if the dollar goes up against the pound, I get more pounds back, if the dollar goes down against the pound, I get less.

I guess the alternative is that the ETF hedges against currency changes or merely applies some accounting magic to remove the risk/benefit.

grey_gym_sock

the base currency of the ETF doesn't give you any currency risk. what it invests in does.

see this very good explanation on monevator.

Shaolin_Monkey

Unless the fund specifically has a currency hedge (if this is the case it is likely to be in the name of the fund, and will definitely be spelt out in the KIID) then you have exposure to whatever the underlying currency risk is.

Rarely you can have them hedged to different currencies, i.e. an MSCI Japan ETF hedged to Euro's, but traded on the London exchange in Sterling. In this case you would be exposed to changes in the Pound/Euro exchange rate.

If the base currency is USD then the daily NAV will be reported in dollars, and I believe the dividends will be paid in dollars, although brokers will convert them to pounds if you don't have a multi-currency account. As the broker I use gives seperate cash accounts for different currencies, I've had distributions on ETFs (e.g. IUSA - iShares S&P 500) paid in dollars despite owning the sterling class shares.

Daniel_Elkington

You either carry currency risk if unhedged or counterparty risk if it is hedged back to sterling.

Which ETF? Why do you ask? Do you want to increase risk by adding in currency risk? Are you sure there is not an equally cost-effective OEIC available?

There is no such thing as accounting magic, what that is called is aggressive tax avoidance and is the focus of HMRC's attention at the moment and best avoided.