US dollar cash proxy

Plus

I'd like to down-risk some US equities, while retaining dollar exposure in my ISA.
The most natural way to do that would be buying bonds, perhaps treasuries, but at present they're at low yields that mean a substantial risk of price falls.

The obvious way to de-risk would be USD cash, which I can't hold in an ISA. There are some USD money market ETFs, but they all seem to be synthetic (and hence a counterparty risk). There's a variety of other US funds I found which all seem to be hedged to Sterling - the opposite of what I want.

So is there anything else that might be a reasonable dollar proxy? I'm prepared to take some volatility but would rather avoid exposure to big short-term risks. Is there anything approximating cash at the Fed rate that might be accessible to a UK ISA investor?

Morphoton

How about an ultrashort $ bond ETF.
iShares do an ETF first this.
See:
https://www.ishares.com/uk/individual/en/products/258117/ishares-ultrashort-bond-ucits-etf
Note that ERND is priced in $ but ERNU is priced in £ depending on what your platform allows.
The ETF is eligible for ISA/SIPP.

bowlhead99

You mention that money market ETFs are synthetic so come with counterparty risk. But of course, if you are not literally putting a million dollars onto the money market yourself and placing it with specific institutions in your own name through direct market access, you have introduced counterparty risk. Someone could fail.

You mention that govt bonds / treasuries have low yields so risk of loss. But really that's only the case with long dated maturities / durations where the price is riding high and would crash if interest rates rose when other things became relatively more attractive. If you get a government bond /note paying two dollars a year interest (semi-annually) which has one more year to run, and then pays back the $100 face value in a year's time, you are unlikely need to to pay much more than $102 for it and you are not going to get back less than $102. The risk is negligible. If rates go up, you will still get the bond payouts.

If you're unable to buy US bonds through your ISA, short-dated US bond funds could easily suit your needs for low returns and low risk of capital loss. Although in practice, they will not hold the bonds right through to maturity and may sell out in the market (especially if other investors in an open-ended funds want to sell out so the fund has to liquidate a portion of all its assets across the range of maturities).

Your "lowest risk" option if you want to avoid as much counterparty and market risk as possible and want us dollar exposure without using bond funds, is to simply take the cash out of your ISA and open a dollar bank account with a UK bank. You lose ISA wrapper on the value, so would have to wait until next year or more to get it back in. However unless you are in danger of exceeding your dividend and CGT allowances because of having lots of unwrapped funds already, that might be a complete non-issue. When you want to be back in US equity funds you could simply buy them unwrapped.

You would generally find that us dollar bank accounts in the UK for are only available paying a monthly fee, and there would be FX costs both ways. But that might be negligible in the context of what you could lose if equities crash.

A further alternative and perhaps easier is just to put the cash released from your US equity invests into GBP-exposed investments within your ISA - and then outside the ISA, use a spreadbet provider such as IG.com to place a USD/GBP spreadbet, which costs you money where dollars depreciate but pays out more money the more dollars appreciate against sterling. So you receive your currency gain or loss in cash in the spreadbet account, broadly equivalent to what you'd have gained or lost in sterling terms inside your ISA if you had been holding dollar cash.

Glen_Clark

Good answer as usual bowlhead.
But if the OP was smart enough to know which currency is going to be the best investment he would be smarter than any of us and wouldn't need to ask us how to invest in it.:D

bowlhead99

Glen_Clark wrote: »

Good answer as usual bowlhead

But of course

But if the OP was smart enough to know which currency is going to be the best investment he would be smarter than any of us and wouldn't need to ask us how to invest in it.:D

Well, he seems to be saying he does *not* know what currency would be the best investment and isn't any smarter than us.

If he was confident that sterling will be the best currency he could have the cash sit around in his ISA, but like most of us he will already have a bunch of sterling currency in savings or current account or incoming monthly salary/ pension, so exiting US equities to get yet more sterling cash will just give him a lot of sterling cash and increase his exposure to sterling while reducing it to dollars.

So, he's looking to reduce exposure to us equities / US market investment risk - but maintain exposure to USD because he doesn't know that sterling would be the best currency and already has some of it,

ISAs can't hold USD currency, but unwrapped accounts can. TD Direct is an example of a brokerage/platform which has a multicurrency cash account which I use between exits and purchases of foreign currency shares in my trading account - though they have recently been taken over and have not confirmed whether all account features will still be available in a few years time; Citibank is an example of a bank which allows USD and Euro accounts to be linked to a debit card alongside GBP accounts (though the lowest (cheapest) tier of service which I use has I think been removed from their offering to new customers).

Plus

Morphoton wrote: »

How about an ultrashort $ bond ETF.
iShares do an ETF first this.
See:
https://www.ishares.com/uk/individual/en/products/258117/ishares-ultrashort-bond-ucits-etf
Note that ERND is priced in $ but ERNU is priced in £ depending on what your platform allows.
The ETF is eligible for ISA/SIPP.

Thanks. I'm not managing to get iWeb to recognise it, or any of the other tickers it has.
They do have the iShares $ Treasury Bond 1-3yr UCITS ETF which is about the only other short(ish)-dated dollar fund I can find.

A while back I was looking for a short-date high-yield USD bond fund but Morningstar searches turn up a lot of weird funds I can't actually buy (at iWeb or Charles Stanley). I had originally lined up Neuberger Berman Short Duration High Yield Bond Fund which is listed by CS, but the platform won't actually let me buy it.

Plus

bowlhead99 wrote: »

You mention that money market ETFs are synthetic so come with counterparty risk. But of course, if you are not literally putting a million dollars onto the money market yourself and placing it with specific institutions in your own name through direct market access, you have introduced counterparty risk. Someone could fail.

Indeed, but with a synthetic ETF the risk is the counterparty goes pop and all you have is a worthless derivatives contract. With a physical ETF, you have some nominal claim on assets somewhere. Unpicking either isn't going to be pretty, but in the last case you should get some percentage back. The latter is a standard risk of investing, the former is an extra risk for only a tiny gain (a fraction of a percent cheaper fees).

If you're unable to buy US bonds through your ISA, short-dated US bond funds could easily suit your needs for low returns and low risk of capital loss. Although in practice, they will not hold the bonds right through to maturity and may sell out in the market (especially if other investors in an open-ended funds want to sell out so the fund has to liquidate a portion of all its assets across the range of maturities).

Indeed, but it's trickier than you'd think to actually buy such a fund.

You would generally find that us dollar bank accounts in the UK for are only available paying a monthly fee, and there would be FX costs both ways. But that might be negligible in the context of what you could lose if equities crash.

Since Citibank disappeared up their own fundament, I haven't found a sane USD bank account in the UK. The FX costs of ~0.5% each way and nonexistence of interest in UK currency accounts mean it's basically a losing strategy - only worthwhile as protection against a crash.

A further alternative and perhaps easier is just to put the cash released from your US equity invests into GBP-exposed investments within your ISA - and then outside the ISA, use a spreadbet provider such as IG.com to place a USD/GBP spreadbet, which costs you money where dollars depreciate but pays out more money the more dollars appreciate against sterling. So you receive your currency gain or loss in cash in the spreadbet account, broadly equivalent to what you'd have gained or lost in sterling terms inside your ISA if you had been holding dollar cash.

I hadn't thought of that option. Not sure I want to go there, but worth pondering, thanks.