Investments in a foreign currency

stphnstevey

If you invest in a S&P 500 ETF listed on the LSE and buy in £, is your investment tied to £ or $?

Is the above any different (apart from using Euros rather than $) to say physically exchange £ for Euros and invest in Euros, with returns in Euros?

In both scenarios above, how does a change in the £ exchange rate effect your returns, presuming you eventually want the returns in £? Is either scenario a hedge against the £ and potential negative impact on the £ due to Brexit?

Hope the above queries make sense, apologies for any obvious mistakes in understanding

AnotherJoe

If you own an investment which is essentially priced in dollars, such as the S&P then it's irrelevant what currency you originally purchased it in, your investment, aside fluctuations in the S&P itself, will change as the currencies change between them, $ goes up relative to £, your investment goes up, and vice versa.
Ignoring the initial cost of purchasing Euros, if you bought the same ETF denominated in Euros, then you'd have two currencies changing to contend with, which could act as a hedge or could be a ratchet pushing your investment up or down.
My view on trying to hedge, however you do it, is it's a waste of time, you can't hold back the tide and you'll pay either way, either for pointlessly holding back the tide or for not needing to hold it back but paying for it anyway.

EdSwippet

stphnstevey wrote: »

If you invest in a S&P 500 ETF listed on the LSE and buy in £, is your investment tied to £ or $?

Assuming this ETF is not currency hedged to GBP (most are not), you get the USD return of the S&P 500 multiplied (modulated) by changes in the USD/GBP exchange rate.

stphnstevey wrote: »

Is the above any different (apart from using Euros rather than $) to say physically exchange £ for Euros and invest in Euros, with returns in Euros?

You mean, using EUR to buy an EUR-traded S&P 500 tracker ETF? In that case, same outcome as above. EUR exchange rates won't factor into your long term returns.

Think of buying an ETF or fund as converting the currency you hold into assets valued in the currencies that the ETF or fund holds. Any transit through an intermediate currency, in this case EUR, will disappear as you only hold EUR for a very short period of time.

stphnstevey wrote: »

In both scenarios above, how does a change in the £ exchange rate effect your returns, presuming you eventually want the returns in £? Is either scenario a hedge against the £ and potential negative impact on the £ due to Brexit?

Again assuming the ETFs are not currency hedged, both will protect against falls in GBP, because in both cases you hold USD denominated assets. The currencies in which the ETF trades and in which it is denominated play no part in your returns. All that matters is the currency in which the ETF's assets are denominated.

AnotherJoe

EdSwippet wrote: »

Again assuming the ETFs are not currency hedged, both will protect against falls in GBP, because in both cases you hold USD denominated assets. The currencies in which the ETF trades and in which it is denominated play no part in your returns. All that matters is the currency in which the ETF's assets are denominated.

Finding it hard to get my head round this. Let's say the Euro falls so it's now 2 Euros to the Pound from 1. So when you cash in your 2k EUR worth of funds, you only get back half as much as you would have done ? Or is that cancelled out because if the EUR fell against the $ then the funds would rise in value ? What if EUR rose against $ but fell against £?
What, me confused ?

EdSwippet

AnotherJoe wrote: »

Finding it hard to get my head round this. Let's say the Euro falls so it's now 2 Euros to the Pound from 1.

If "the Euro falls" by a factor of 2, say, then it also falls relative to the USD. So your S&P 500 ETF denominated in (and trading in) EUR is now showing as worth twice as many EUR as it was, but when you convert them back to GBP you get the same amount as you would have before the fall.

AnotherJoe wrote: »

Or is that cancelled out because if the EUR fell against the $ then the funds would rise in value ?

That. Pedantically, the funds wouldn't "rise in value", but rather their indicated value as shown in EUR will appear larger. They remain the same value in GBP terms.

ETA: Explained fully in this Monevator article: http://monevator.com/currency-risk-fund-denomination/

stphnstevey

Sorry not clear to start with, the Euro investment was something else than an S&P 500 ETF, it was investing in P2P loans in Euros

I was wondering if buying and holding P2P loans in Euros was any different to buying a ETF in £, that has its assets in $, which are converted back to £ when sell?

The Euro P2P investment seems similar in that there is a £ exchange rate when buy, the investment held in Euros, which are converted back to £ when sell


So if I have this correct, only whilst the investment is being held in the foreign currency is there any hedge against a fall in £?

The benefit or loss in this is crystallised when you buy and sell, so ideally hold for a period where you think the £ might fall?

Voyager2002

stphnstevey wrote: »

Sorry not clear to start with, the Euro investment was something else than an S&P 500 ETF, it was investing in P2P loans in Euros

I was wondering if buying and holding P2P loans in Euros was any different to buying a ETF in £, that has its assets in $, which are converted back to £ when sell?

The Euro P2P investment seems similar in that there is a £ exchange rate when buy, the investment held in Euros, which are converted back to £ when sell


So if I have this correct, only whilst the investment is being held in the foreign currency is there any hedge against a fall in £?

The benefit or loss in this is crystallised when you buy and sell, so ideally hold for a period where you think the £ might fall?

If you hold an investment in foreign assets (for example P2P Euro loans) then a fall in the pound makes no difference to their value IN EURO. Obviously a fall in the pound means that the sterling value of a sum in Euro rises. Now, it is possible to buy 'hedged' ETFs: you pay in sterling for some assets in Euro, and if the exchange rate changes then the value in pounds is adjusted so that the sterling value of your investment does not change. There is a fee for this of course, and it would not be wise if you believed that the pound was likely to fall.

Linton

stphnstevey wrote: »

Sorry not clear to start with, the Euro investment was something else than an S&P 500 ETF, it was investing in P2P loans in Euros

I was wondering if buying and holding P2P loans in Euros was any different to buying a ETF in £, that has its assets in $, which are converted back to £ when sell?

Err yes - the value of the P2P loans will rise and fall as the Euro rises and falls against the £. A $ ETFs value in £s would rise and fall as the $ rises and falls against the £. These are almost certain to be different as the $/Euro rate will change over time.

..........

So if I have this correct, only whilst the investment is being held in the foreign currency is there any hedge against a fall in £?

The benefit or loss in this is crystallised when you buy and sell, so ideally hold for a period where you think the £ might fall?

A hedge normally means one is attempting to reduce the effect of changes in currency value. If you believe the £ is going to fall that is not what you want your foreign investments to do. Perhaps a better description would be that foreign holdings would mitigate the effects of a fall in the £. Of course they would then suffer if the £ rose in value.

AnotherJoe

EdSwippet wrote: »

If "the Euro falls" by a factor of 2, say, then it also falls relative to the USD.

Thank for all that. But is there a scenario where the £, € and $ change in such a way that you get either a double whammy or double bonus? eg lets say euro falls against dollar but rises against pound? Or by definition does one cancel the other?


(ps this is why i dont trade currencies )

Linton

AnotherJoe wrote: »

Thank for all that. But is there a scenario where the £, € and $ change in such a way that you get either a double whammy or double bonus? eg lets say euro falls against dollar but rises against pound? Or by definition does one cancel the other?


(ps this is why i dont trade currencies )

If the $ rises againt the Euro which rises against the £ the $ must rise even more against the £. For example

Day 1) £100=$150=Euro 120 therefore 1 Euro=$150/120 Euro=$1.25

Day 2) £100=$121=Euro 110 therefore 1 Euro=$121/110=$1.1


Currency values always change between themselves such that if you switch £->Euro->$->£ you end up extremely close to what you started with, minus charges.

bd10

I think non-UK mutual funds could be a more or less effective hedged. The ones I hold gained significantly during the Sterling depreciation following the 2016 referendum results. These funds hold 95% US and European stocks with exposure to UK stocks limited to <5% Unilever, so that's a pretty good hedge.