Hedged S&P ETF

aroominyork

I have just charted, on HL, the S&P 500 (yellow) against XDPG (blue) which is a hedged S&P 500 ETF. I expected them to match, or be close to matching, but they are far from it. Can someone please explain? Is the the index charted to take into account currency fluctuations?

Linton

When you display the S&P500 they will convert the $s to £s at the then current rate. So if you graphed an unhedged tracker against the S&P500 the values should match.


By going for a hedged fund the currency conversion factor will be that when you bought the fund. So as the value of the £ has been falling against the $ you will get less £ from your fund than if it was unhedged.

bowlhead99

If you are on the HL, Trustnet or UK Morningstar site, for a UK audience, they will present the fund performance and indices translated to pounds.

The two products would have a very different performance over that 2015 to 2029 timescale because one tries to hedge foreign exchange movements and the other doesn't.

You can see the major effect on the chart in late June 2016. On the day of the UK referendum the S&P 500 didn't move too much, so the blue line (which represents a fund that invests in the S&P components and tries to hedge currency movements) also didn't move too much.

However, the exchange rate moved drastically as dollars strengthened relative to pounds - and due to the fact that in a short space of time, $10,000 was suddenly worth a lot more pounds, the yellow line (representing the worth of a basket of US blue chip shares, valued in pounds) shot up.

If you successfully hedge away the FX gains and losses, you won't get that gain when dollars strengthen, nor vice versa when they weaken.

If you change the timescale to 3 years you'll just about miss the original system shock of sterling becoming worth fewer dollars.

AnotherJoe

aroominyork wrote: »

I have just charted, on HL, the S&P 500 (yellow) against XDPG (blue) which is a hedged S&P 500 ETF. I expected them to match, or be close to matching, but they are far from it. Can someone please explain? Is the the index charted to take into account currency fluctuations?

Why expect them to be the same ? Hedged should somewhat erase currency fluctuations (and then minus a fair bit for the cost of that) and unhedged will not remove currency variations at all, so if the pound has fallen 20% then the US dollar share value of the unhedged will have risen 25%. If they were going to be the same, there would be no point to a hedged one.

aroominyork

I guess my point is about how HL presents the data. The yellow line on the graph was pulled from the Index dropdown list (rather than the Fund or Equity dropdowns) and I expected that to show the 'raw' performance of the index, not taking currency into account.

bowlhead99

AnotherJoe wrote: »

Why expect them to be the same ? ....
.... If they were going to be the same, there would be no point to a hedged one.

Very true. But the OP's confusion can be understandable, if they think that something that is an index (rather than a fund) presented on a chart is going to be in the standard base currency of that index and that the chart will be going up in a week that the TV news around the world days that index is going up.

Then if you are looking at a UK product that hedges currency difference, it would hopefully make the same proportional gains and losses as the raw index would be giving to the (e.g.) US investors who invest locally into their own index. So the percentage gains on your product would would track closely to the returns that US investors get, if it was doing a good job of hedging.

But this is not how UK performance-reporting sites like HL, Morningstar UK and Trustnet work. When adding benchmarks to the fund data, they retranslate the foreign indexes to express a return in pounds sterling. So if you compare on a chart a standard US unhedged index tracker with the US index, they will both be translated to pounds for presentation purposes, and should track extremely closely. Whereas if you have a hedged product against an unhedged index, you'll get a big difference, potentially.

This can all get confusing if you use (e.g.) the last 3 years data instead of the last 5 years data, because the former misses the big currency weakening in late June 2016 which happened just over three years ago. Then there isn't a big one-off shock to one of the chart lines, and if you don't quite know what to expect for the raw USD returns of the index anyway (because most media quotes the changes in the capital value of the index and doesn't give the total return including dividends), you can potentially get a bit lost.

aroominyork

bowlhead99 wrote: »

But the OP's confusion can be understandable, if they think that something that is an index (rather than a fund) presented on a chart is going to be in the standard base currency of that index and that the chart will be going up in a week that the TV news around the world days that index is going up.

Yes, that's exactly it. A chart showing an index - rather than a fund - should, to my mind, show the raw price in the currency of the index and not convert to the Sterling value. But hey, they aren't going to change it just for me!

Can I just check that the index charts are based on reinvested income? They look like they are (which is another way they differ from the TV news!).

Linton

aroominyork wrote: »

Yes, that's exactly it. A chart showing an index - rather than a fund - should, to my mind, show the raw price in the currency of the index and not convert to the Sterling value. But hey, they aren't going to change it just for me!

Can I just check that the index charts are based on reinvested income? They look like they are (which is another way they differ from the TV news!).

Yes, charts that show the index along sideother investments are normally with income re-invested so that you can make a meaningful direct comparison. Trustnet gives you the choice but only for the graph as a whole, you cant compare one investment with income reinvested with with another that isnt. Not that it makes any sense to do so anyway.