Developed World ex-UK ETF

bowlhead99

pip895 said:

As we are discussing global etf's what are peoples views on the following ETFs:-

HMWO   GBX
HMWD   USD
IWDG    GBX   Hedged

My main investment in my ISA is in HMWO purchased a couple of years ago but at the beginning of 2019 I decided to purchase IWDG because I felt at the time sterling was rather undervalued and might appreciate against the dollar.  Graphing all three of these funds IWDG actually mirrors HMWD very closely.  I'm not sure what the differences are in practice - GBX listed rather than Dollar listed - would there be additional currency conversion costs associated with the dollar denominated fund?   Glancing at the documentation HMWD is un hedged whilst IWDG is hedged - I'm confused - why is HMWD so different to HMWO and why does it appear to track my hedged IWDG?

HMWD is not so different to HMWO at all, other than if you look at their prices in their two base currencies the percentage returns will appear to be different because they have the exact same assets and you're choosing to measure their returns on two different currency scales.

If you instead show the performance rebased to GBP, they give the same results. But of course they will look like they give different results if you display one of the results in a different currency.

If IWDG is giving a return in pounds which is a pretty similar percentage return as the dollar investors get on their investment in HMWD, it shows that the hedge is working reasonably well, ie the currency gains and losses have been absorbed by the product so that if an American doubles his dollars by buying and holding the dollar index, the Brit can also double his pounds by holding the same index of stocks even if the exchange rate moves all over the place. That is the purpose of the hedge.

If the pound strengthened significantly an investor in HMWD or HMWO would lose value when converted back to pounds in their bank account, because the underlying investments like Apple and Microsoft would be worth fewer pounds.  However an investor in IWDG should not lose as much money because the currency effect is hedged and if Apple and Microsoft only go down by 1% in dollars the GBP hedged investor should only lose 1%, even if those dollars are worth 20% fewer pounds.

Of course, the hedge will not be perfect and will cost money to implement, so the returns of investing in a hedged product may be lower in practice than the percentage raw returns on the underlying investments. People using hedges accept this ongoing extra drag on returns in the hope that they can be insulated from catastrophe. or a long term sustained change in currency rates.  However, the hedge may be even less effective in times of catastrophe, and if the change is really slow, the cost of hedging it might exceed the actual rate of change. But if there are large movements, even a hedge that isn't very effective may still be better than the unhedged losses.

I'm not sure what the differences are in practice - GBX listed rather than Dollar listed - would there be additional currency conversion costs associated with the dollar denominated fund? 

If you are buying the dollar denominated fund then your broker has to pay dollars to get it from the person who is selling it to him on the stock market.

If what you are putting into your ISA is pounds (which it must be, because HMRC doesn't allow ISAs to hold any foreign currency cash), the broker will have to convert the cash to get dollars to pay the person who is selling it to him on the stockmarket at an agreed dollar price. The commission for converting the pounds to dollars will be lower than you would pay at a foreign exchange booth at the airport but may be half a percent to a percent or even a bit more with some brokers. So if you chose to buy $130 of the ETF it might cost you a little over £100 to buy it but if you sold it for the same $130 you would get a little less than £100 back as your proceeds, losing a couple of percent for the 'round trip'.

For that reason it would make sense for a UK ISA investor to buy HMWO instead of HMWD because people trade HMWO between themselves on the stock exchange at a price agreed in pounds, and your broker doesn't need to do any currency converting for you. He just buys it for £100 and if Apple and Microsoft etc don't change in price and a dollar doesn't become worth more pounds or fewer pounds, you can sell it later in the day for the same £100, without paying your broker any FX commissions.  

pip895

Brilliant explanation - Bowlhead  Thank you! 

I hadn't realised the graphing on HL differed between plotting under funds and shares.  Adding HMWO & HMWD ta graph of say LS100 gives the correct results -in that HMWO & HMWD look the same, but plot them directly from the shares section and they look very different.  Something I will have to watch out for - I sometimes go to the share type graphs because they plot up to 10 years rather than just the last 5 years in the funds section.

colba

Looking at HSBC MSCI World ETF in more detail. It looks like I own the HMWO version bought with Halifax share dealing. This is priced in GBP and HMWD is in USD. Neither are hedged so respective values will vary when exchange rates fluctuate. IWDG however is hedged so value will vary from HMWO when exchange rates fluctuate, in fact it seems to follow closely the HMWD value.
Had to edit as struggling to get this right, will now read the bowlhead post!

colba

Checking with HSDL, I think they only offer HMWO not HMWD in their ISA

bowlhead99

colba said:

Checking with HSDL, I think they only offer HMWO not HMWD in their ISA

I expect they would be able to add it if you asked them. The one with the D at the end has the same risks, approx same charges, same domicile and listed on the same stock exchange, and a KID should be available meeting the regulatory requirements.

However if you're doing it in an ISA the cash in your account will definitely be in GBP regardless of what broker you're with (because HMRC don't allow foreign currency cash to sit in an ISA). 

So every time you buy a share of the ETF, your broker would need to convert enough of your GBP cash to dollars to settle the dollar purchase price for the number of shares you're ordering. This would inevitably cost an FX commission on the trade value and you would get the same effect when you sell, costing you some small percentage of your sales proceeds before you got your pounds back.

Therefore it probably doesn't make a lot of sense to ask Halifax to make the USD share class of the HSBC fund available to you, instead of buying the GBP-priced one as you currently do. 

IWDG would give you a different profile of returns, due to being hedged. It only looks like it follows the chart of HMWD if you print the HMWD chart in dollars and the IWDG one in pounds. If you did them both in pounds the two charts would be quite different, unless the dollar pound exchange rate was pretty consistent all year - and even if it is, some years, it will move significantly in others.