ETFs and currency exchange rates

bw99

Hi,

I'm fairly sure I know the answer to this, but I want to double-check something.

I am investing in ETFs because I like the diversification in tracker funds, but it has occurred to me to be worried about the lack of diversification if the tracker is exclusively UK, because of the risk of a weakening pound.

Let's say I have investments in two ETFs:

ISHARES VII PLC CORE S&P 500 UCITS ETF USD
and
ISHARES VII PLC FTSE 100 UCITS ETF GBP ACC

Does the fact that one is priced in USD and the other in GBP to some extent insulate me from currency fluctuations between the UK and the US?

If the markets stay flat, but the exchange rate moves by 10% (in whichever direction), would I make the same if I cashed them both out in GBP?

Many thanks!

EdSwippet

bw99 wrote: »

Does the fact that one is priced in USD and the other in GBP to some extent insulate me from currency fluctuations between the UK and the US?

The currency in which an ETF is denominated (priced, traded) plays no part in your long-term return. The only place currency effects do come into play is the rate between your currency and the currency in which the assets that the ETF holds are valued.

bw99 wrote: »

If the markets stay flat, but the exchange rate moves by 10% (in whichever direction), would I make the same if I cashed them both out in GBP?

No, but only because they hold assets valued in different currencies, and not because the funds use different denomination currencies.

If USD/GBP moves, the stocks that your S&P 500 tracker holds change value to match when measured in GBP, but the stocks that your FTSE 100 tracker holds do not (excluding effects like UK and US stock prices moving in response to currency shifts, and also assuming that the fund or ETF is not currency-hedged -- most are not, but a few are).

If you think the pound will weaken (or the dollar strengthen), you could try to hedge that by buying US stocks in any ETF, no matter its denomination currency. Predicting currencies is even harder than predicting stock prices, though.

Linton

bw99 wrote: »

Hi,

I'm fairly sure I know the answer to this, but I want to double-check something.

I am investing in ETFs because I like the diversification in tracker funds, but it has occurred to me to be worried about the lack of diversification if the tracker is exclusively UK, because of the risk of a weakening pound.

Let's say I have investments in two ETFs:

ISHARES VII PLC CORE S&P 500 UCITS ETF USD
and
ISHARES VII PLC FTSE 100 UCITS ETF GBP ACC

Does the fact that one is priced in USD and the other in GBP to some extent insulate me from currency fluctuations between the UK and the US?

If the markets stay flat, but the exchange rate moves by 10% (in whichever direction), would I make the same if I cashed them both out in GBP?

Many thanks!

If your two funds are both invested in the same index then the currency they are priced in should not make a major difference - possibly, I guess, charges may be slightly different.


However in your example you have chosen two funds that invest in different things. This invalidates the assumption that both markets can stay flat whilst the exchange rate varies. The point is that the FTSE100 invests mainly in very large multinational companies which trade alongside similar companies' shares across the world. So if the £ dropped in value against the dollar a major UK oil company for example would suddenly appear cheaper in $s than the equivalent US oil company. Therefore people would sell the US oil company to buy the UK company and the UK company's price in £s would rise to the point where it was much the same in $s as previously. So a £ investor would gain. This is why the FTSE100 increased during the days after the BREXIT vote.


On the other hand if you had chosen the smaller companies in the FTSE250 rather than the FTSE100 multinationals you would have found that the BREXIT vote caused the FTSE250 to fall because smaller companies are more likely to be held locally and so more strongly influenced by local economic events and less so by currency variations, at least in the short term.

dividendhero

bw99 wrote: »

However in your example you have chosen two funds that invest in different things. This invalidates the assumption that both markets can stay flat whilst the exchange rate varies. The point is that the FTSE100 invests mainly in very large multinational companies which trade alongside similar companies' shares across the world. So if the £ dropped in value against the dollar a major UK oil company for example would suddenly appear cheaper in $s than the equivalent US oil company. Therefore people would sell the US oil company to buy the UK company and the UK company's price in £s would rise to the point where it was much the same in $s as previously. So a £ investor would gain. This is why the FTSE100 increased during the days after the BREXIT vote.


On the other hand if you had chosen the smaller companies in the FTSE250 rather than the FTSE100 multinationals you would have found that the BREXIT vote caused the FTSE250 to fall because smaller companies are more likely to be held locally and so more strongly influenced by local economic events and less so by currency variations, at least in the short term.

That's only part of the picture.

An exporter such as Diageo can make whiskey in Scotland and pay their staff in low pounds, but then sell the whiskey for more valuable dollars, Yen, euros etc. Hence their profits will be boosted by the pounds fall.

FTSE 250 companies contain less exporters and are more exposed to the UK economy

Linton

dividendhero wrote: »

That's only part of the picture.

An exporter such as Diageo can make whiskey in Scotland and pay their staff in low pounds, but then sell the whiskey for more valuable dollars, Yen, euros etc. Hence their profits will be boosted by the pounds fall.

FTSE 250 companies contain less exporters and are more exposed to the UK economy

Possibly (**) true but that is a long term affect whereas the changes in share price are almost immediate. Counter to the advanrtages of the decreasing cost of labout in external currency terms we have the increased cost of raw materials in £ terms.


(**) However many of the major FTSE100 constituents dont do most of their business in the UK, have most of their staff employed in the UK, or even manufacture significantly in the UK. Their strength comes from their world-wide business. For example Glaxo - 100,000 employees worldwide, 16,000 in the UK. BP has 15,000 employees in the UK and 84000 worldwide.

Tom99

[FONT=Verdana, sans-serif]I would have thought its the fact that the large FTSE100 co's earn their profit in a different currency be it US$ or whatever, that causes them to increase in value when the GB£ falls, not the fact they are multi-national competitors or have overseas employees.[/FONT]
[FONT=Verdana, sans-serif]A small entirely UK based co, but which makes most of its profit from overseas sales, would have risen in value just the same.[/FONT]