ETF Hedged FX differences

seppel05

Hi there,

Can someone please explain to me how to compare FX hedged ETFs across different tranches? For reference, I am looking at the iShares Global Corporate Bond UCITS ETF and its tranches that are hedged against the USD (CRPU), the EUR (CRPH) and GBP (CRHG).

When I look at the YTD performance in the respective currencies, I get the following:

- CRPU (in USD): +0.53%

- CRPH (in EUR): -0.47%

- CRHG (in GBP): -0.87%

Should - in theory - the performance not be the same for all 3? What explains the difference? The hedging costs? And if so, do those really make up >1% for a period of 4 months?

Sailtheworld

If, I'm understanding correctly, all three are invested in the same underlying assets and hedged such that the performance is intended to to the the same % whatever the currency then it's a hedging error.

Hedging isn't easy. It's also temporary - if you hedge based on the underlying assets on a certain date then by the next day the hedging will also be out and need to be adjusted (at a cost). I don't know how volatile the underlying assets are in this case but increased volatility will make hedging even more problematic.

bowlhead99

I couldn't see where your numbers came from as they don't match either iShares own site or Morningstar and the markets have been volatile (e.g. Morningstar say CRHG total return was -1.01% YTD 28 April, while they say its price return YTD to 31 March was -4.88% and iShares say NAV total return YTD 31 March was -5.42%

But the simple answer is just down to the fact that hedges are imperfect, so a USD-hedged US investor (CRPU) will not get the exact same result in their own currency as a GBP-hedged UK investor (CRHG) or a EUR-hedged EU investor (36B7 or CRPH). 

The combination of hedging inefficiency and inaccuracy in volatile markets means that the returns might look quite different from each other when the overall return is small anyway - e.g. the hedging is trying to cover the whole balance plus the return (i.e. if an investment of 100 produces a return of 1, you are trying to hedge 101 and the inaccuracies might cost you 0.5 either direction, which is fine if you are trying to avoid a 20-25% adverse currency movement but 0.5 is half of your return of 1, so the hedged result can literally halve your return or add a half to it...

From iShares's site performance data section (where YTD is to 31 March 2020):

YTD  1m     3m    6m    1y        

-4.98 -7.31 -4.98 -4.88  n/a     EUR-hedged EU investor (36B7)

-4.81 -7.13 -4.81 -4.70 0.01    EUR-hedged EU investor (CRPH)

-4.59

-6.97

-4.59

-4.47

0.34    Benchmark index hedged to EUR, measured in EUR

Those numbers do not seem too far from the hedged version of the benchmark, with the difference broadly accounted for by product costs and hedging cost.

However in other currencies they may not be as succesful - dollar moved 5% overall against sterling from 31 March '19 to 31 March '20, but the swing from one extreme to the other within the period was more than that: from 1.35 in mid December to 1.16 in late March, before coming back to 1.25 by the end of March as governments grappled with policy responses at different times. So when the asset base is volatile and the currencies can move 5-10% in a week, the hedge will not be perfect or cheap to implement.