Emerging Markets fund?

Bruckner

Looking at small/mid cap for EM with value. There are blend options with SPDR and iShares, and Wisdom Tree with a value tilt. The 2 WT funds are:
WisdomTree Emerging Markets SmallCap Dividend UCITS ETF (GBP) DGSE
WisdomTree Emerging Markets SmallCap Dividend UCITS ETF DGSD
The annual returns from each vary presumably because GBP is weakening v USD.
Question: If looking for returns that more closely reflect EM stocks performance rather than GBP currency, is USD the choice (understading when GBP weakens as it has been you give up some currency gains)?

Linton

The USD fund will have almost exactly the same value in £ terms in your portfolio as the GBP version at the then current exchange rate. Why do you think the returns will differ when expressed in £s?  You cannot avoid currency effects since the underlying assets probably won't be priced in £s.

Also, when the £ weakens against other currencies the price increases in £ terms since it takes more £s to equal a $ (or your currency of choice).

bowlhead99

You seem to be confused. The two versions of the fund you are looking at are simply two listings of the same fund. They both give exposure to the same underlying assets. Neither of them hedge currencies. The only difference is that one of them shows its price in pounds.  Whether you display the price in dollars or pounds it is the same assets and you will get the same return. You are just making a choice whether you want to 'keep score' in dollars or pounds.

If you spend £10000 to buy the one in dollars when the rate is £1=$1.12 and your broker changes your money to $12000 and buys 1000 shares at $12 each, and then the index doubles in value measured in dollars ($12 a share turns into $24 a share, now $24000 total value) but pound strengthens against dollars to £1=$1.60, your $24,000 worth of shares will be worth £15000 when the broker sells your shares and buys pounds with the proceeds, and you have made 50% return overall as a UK investor who runs his life in pound sterling - despite the the shares listed in dollars, doubling in price.

If you spend £10000 to buy the one listed in pounds, the broker will not need to change your money and will just buy 1000 shares priced at £10. You still get exposure to the same portfolio. If the facts are the same as in the first example, the portfolio will double in value measured in dollars but only increase 50% when measured in pounds. So the pound share price will be £15 while the dollar share price is $24. When your broker sells your 1000 shares at £15 each, you still get £15000.

The real-world difference will be that if you choose to buy the version of the shares that publishes its price in dollars, your broker has to do an fx conversion to buy and another one to sell, and no doubt there will be a commission on the fx rate both ways, so you would have been better to just buy the version that published its price in pounds so your broker didn't need to convert your pounds to settle the trade.  However, with international indexes, sometimes the dollar versions of some ETFs listed in London have greater liquidity allowing you to buy them in greater volume with less of a spread between buying and selling prices. And it might be that the price of one ticks up before the other during the course of a day.  You can check the prices of both before you buy. 

Mike997

I think I have got similar question and although the answers above are great I am still confused   (sorry, I am new to investing and prefer to ask stupid question rather than make a stupid mistake and lose money)

I am interested in Polish stock exchange ETF (I can`t share the link to HL here for some reason):

ISHARES V PLC MSCI POLAND UCITS ETF USD ACC (GBP) (SPOL)

ISHARES V PLC MSCI POLAND UCITS ETF (IPOL)

As it is with the example in the first post, there are two ETFs to choose from. One in USD and one in GBP. The thing is that both of them have got exactly the same "Key Investor Information Document", which says: "Your shares will be denominated in US Dollar, the Fund's base currency."

Since dollar is massively overpriced these days as it always is during every crisis, I am expecting USD to drop against GBP long term and don`t want to have long term exposure to USD.

Bowlhead above says: "Whether you display the price in dollars or pounds it is the same assets and you will get the same return." But If I buy this ETF in GBP and lets say the value of those 10 Polish companies goes up 20% but at the same time USD lost 20% value against GBP, does it mean that I am on 0 (minus Fund charges obviously) even though I bought GBP ETF? If so are there any pure GBP ETFs available, as buying something in GBP denominated in USD seems to expose me to double risk, one is ETF value and the second one is currency fluctuations which I would prefer to avoid.

Sorry once more for silly question and thanks in advance for the answer!

Linton

Mike997 said:

Bowlhead above says: "Whether you display the price in dollars or pounds it is the same assets and you will get the same return." But If I buy this ETF in GBP and lets say the value of those 10 Polish companies goes up 20% but at the same time USD lost 20% value against GBP, does it mean that I am on 0 (minus Fund charges obviously) even though I bought GBP ETF? If so are there any pure GBP ETFs available, as buying something in GBP denominated in USD seems to expose me to double risk, one is ETF value and the second one is currency fluctuations which I would prefer to avoid.

Sorry once more for silly question and thanks in advance for the answer!

Assume that the price of the £ fund is £1/unit and that at the start of the year £1=$1.2:

Assume that the underlying investments are in euros and the pound keeps in step with the euro:

You buy the GBP version:

1) You spend £100 and buy 100 units

2) The units increase in value by 10% and are worth  110 euro

3) You sell the units getting £110

Now lets assume you buy the $ version at a rate of $1.2/unit

1) You spend £100 to convert to $120 and buy 100 units

2) The units increase in value by 10% and are worth 110 euro

3) The $ drops to 1 euro=£1=$1.4 ( a drop of 17%), so the units are now worth 110 euro =$154

4) You sell the units to get $154 which you exchange for £110

bowlhead99

Mike997 said:

As it is with the example in the first post, there are two ETFs to choose from. One in USD and one in GBP. The thing is that both of them have got exactly the same "Key Investor Information Document", which says: "Your shares will be denominated in US Dollar, the Fund's base currency."

Since dollar is massively overpriced these days as it always is during every crisis, I am expecting USD to drop against GBP long term and don`t want to have long term exposure to USD.

Bowlhead above says: "Whether you display the price in dollars or pounds it is the same assets and you will get the same return." But If I buy this ETF in GBP and lets say the value of those 10 Polish companies goes up 20% but at the same time USD lost 20% value against GBP, does it mean that I am on 0 (minus Fund charges obviously) even though I bought GBP ETF? If so are there any pure GBP ETFs available, as buying something in GBP denominated in USD seems to expose me to double risk, one is ETF value and the second one is currency fluctuations which I would prefer to avoid.

Sorry once more for silly question and thanks in advance for the answer!

The fund's base currency is dollars (for accounting and reporting purposes) and you are buying a share that's worth a proportion of the total value of the fund. It happens to be valued in dollars but could just as easily be valued in pounds or euros. When you come to exchange that share with other prospective investors in the online marketplace known as 'the stock exchange', you agree a price at the time of the transaction. There are two different tickers for the share, one with a published price in pounds and one with a published price in dollars. Let's say you invest loads of money and own 1% of the total fund. The value of that 1% ownership stake is derived from the underlying values of the companies it holds. The VALUE is the same, whichever currency you choose to use to agree the price to buy or sell a unit of the fund. The PRICE will reflect the exchange rates at the time of the transaction, for how much that VALUE translates to in the different currencies.

The value of Polish companies might usefully be described in Zloty (PLN). However international investors do not use the Zloty very much and so they have decided to value the fund's holdings and its income and expenses in a more 'international' currency: USD.  It does not really matter that you consider the dollar 'massively overpriced these days'. When the value of the dollar weakens, the polish companies will be worth more dollars. But as the dollars are weaker, that amount of dollars is worth fewer pounds than that amount of dollars is worth today. Your exposure is to Polish businesses and ultimately you will get pounds back in your hand after buying them and later selling them.

If you like, you can buy the version that publishes its price in dollars from day to day. Or you can buy the version that publishes its price in pounds from day to day. Either way, you are going to buy exposure to businesses in Poland, some of which conduct most of their activities in Poland and some which have significant international elements. Ultimately you care about investing pounds from your dealing account and getting pounds back to your dealing account.  You can ignore the fact that the US dollar even exists. It is just a different unit with which you can keep score.

Bruckner

bowlhead99 said:

You seem to be confused. The two versions of the fund you are looking at are simply two listings of the same fund. They both give exposure to the same underlying assets. Neither of them hedge currencies. The only difference is that one of them shows its price in pounds.  Whether you display the price in dollars or pounds it is the same assets and you will get the same return. You are just making a choice whether you want to 'keep score' in dollars or pounds.

If you spend £10000 to buy the one in dollars when the rate is £1=$1.12 and your broker changes your money to $12000 and buys 1000 shares at $12 each, and then the index doubles in value measured in dollars ($12 a share turns into $24 a share, now $24000 total value) but pound strengthens against dollars to £1=$1.60, your $24,000 worth of shares will be worth £15000 when the broker sells your shares and buys pounds with the proceeds, and you have made 50% return overall as a UK investor who runs his life in pound sterling - despite the the shares listed in dollars, doubling in price.

If you spend £10000 to buy the one listed in pounds, the broker will not need to change your money and will just buy 1000 shares priced at £10. You still get exposure to the same portfolio. If the facts are the same as in the first example, the portfolio will double in value measured in dollars but only increase 50% when measured in pounds. So the pound share price will be £15 while the dollar share price is $24. When your broker sells your 1000 shares at £15 each, you still get £15000.

The real-world difference will be that if you choose to buy the version of the shares that publishes its price in dollars, your broker has to do an fx conversion to buy and another one to sell, and no doubt there will be a commission on the fx rate both ways, so you would have been better to just buy the version that published its price in pounds so your broker didn't need to convert your pounds to settle the trade.  However, with international indexes, sometimes the dollar versions of some ETFs listed in London have greater liquidity allowing you to buy them in greater volume with less of a spread between buying and selling prices. And it might be that the price of one ticks up before the other during the course of a day.  You can check the prices of both before you buy. 

Thanks for the detail in this.
I accept that both the GBP and USD versions are the same, and you say there is no hedging. But returns for each fund over the last 5 years is very different. So that led me to think GBP USD exchange rate must be the difference. If it's not weak GBP making the difference, what is? And which gives an investor the closest to the pure EM stocks return undistorted by whatever may happen with GBP?
How to be long on EM small cap without having to be short on GBP?

Mike997

Thanks a lot both Linton and Bowlhead for your time, you helped me a lot. I came across this link - https://www.justetf.com/uk/news/etf/the-effect-of-currencies-on-etfs.html - which explains it nicely too if anyone else comes to this topic.

1.  Underlying currency

Have you ever seen a World ETF that says its currency is dollars, while another version of the same product is labelled in pounds? That makes no difference whatsoever to your currency risk. What counts is your exposure to the currency the underlying securities trade in. Returning to our MSCI World pie chart from earlier, 60% of your currency exposure is to the US dollar because 60% of the ETF’s securities are traded in that currency on the US market. 8% of your exposure is to the yen, and so on. This has two important implications. If a World ETF is labelled in US dollars (see the other terms below to understand why that happens), your currency exposure to the US dollar is still only 60%. Your 8% Yen risk isn’t somehow amplified by dollar risk too. A UK investor in Japanese securities is only concerned with the yen: pound exchange rate. The dollar isn’t part of that equation. An ETF labelled in pounds doesn’t save you from currency risk either unless its specifically GBP hedged (more on that below). Therefore, to understand your currency risk, you need to know which currencies an ETF’s underlying securities are traded/priced in.
 
In other words, since this ETF has got exposure to Polish market only, I assume that only GBP / PLN ratio will affect future currency changes? Even though the fact-sheet says:
Fund Base Currency USD
Share Class Currency USD

One more question if you don`t mind. What about divided payments if you buy for example above-mentioned Polish Stock Exchange ETFs with 10 the biggest companies. Let`s say PKO BP bank, which pays divided, weights 13,4% of this ETF. If I buy it for 20.000£, does it mean that PKO BP weights 0,134 * 20.000 = 2680£ and this is the amount the dividend will be calculated on? Or there is no divided at all if you go for ETF?

Linton

Mike997 said:

One more question if you don`t mind. What about divided payments if you buy for example above-mentioned Polish Stock Exchange ETFs with 10 the biggest companies. Let`s say PKO BP bank, which pays divided, weights 13,4% of this ETF. If I buy it for 20.000£, does it mean that PKO BP weights 0,134 * 20.000 = 2680£ and this is the amount the dividend will be calculated on? Or there is no divided at all if you go for ETF?

Companies pay dividends on the basis of cash per share.  The current market value of the shares is irrelevent.  The % yield which is often quoted is a calculated value, determined after the event.

So if you bought into a fund you could in principle work out how many shares of a particular company are included. Although prices may change and provided the fund does not buy or sell any of those shares (eg its a tracker), then the amount of dividend that company contributes is fixed.