Investing in UK ETFs U.S Tech Heavy - Exchange Rate

RolandFlagg

Just trying to get my head around this...
I dabbled with putting small amounts into U.S Tech stocks via T212.
Lately I've noticed that even though the stocks are up, I'm losing on them. I finally figured out that is because the stocks are in dollars and the exchange rate has moved against me lately.
So....on T212 there are a few ETFs that have exposure to the U.S Tech stocks I'm interested in, but the ETF itself is in £.
Examples: CNX1, EQQQ, IITU.
But I take it even though I will be paying for these ETFs in sterling, because the stocks within them are in dollars, I will still be at the mercy of any large exchange rate fluctuations?
Thanks.

Thrugelmir

Unless the fund hedges the currency risk, then yes.  

RolandFlagg

Thanks for the reply.
Being a long term investor, hopefully it should even itself out.

bowlhead99

RolandFlagg said:

there are a few ETFs that have exposure to the U.S Tech stocks I'm interested in, but the ETF itself is in £.
Examples: CNX1, EQQQ, IITU.
But I take it even though I will be paying for these ETFs in sterling, because the stocks within them are in dollars, I will still be at the mercy of any large exchange rate fluctuations?

If the ETF buys a share in Microsoft for $200, when $200 is worth £150ish  ; and then later you want to sell your position in the ETF when the Microsoft share it owns is worth $220, but the exchange rate has moved so that $220 is only worth £140... then you will lose pounds of value even though the underlying tech company is going up in value when measured in the (now weaker) dollars. The underlying Microsoft share may be worth more dollars and fewer pounds, while still being worth the same amounts of euro or yen that it is worth today - the different currencies are just different ways of measuring it.

You can't avoid that effect (of a share of Microsoft becoming worth fewer pounds when sterling strengthens) simply by buying an ETF that happens to publish its price in sterling or euro or yen, if what you are asking the ETF to do for you is hold a portfolio of marketable shares in companies.

As Thrugelmir says, only if it is a 'GBP hedged' ETF will they be trying to minimise FX movements so you make the same percentage gain as someone buying the underlying shares with the same underlying currencies (e.g. microsoft going up 10% in dollars makes you a 10% gain in sterling even if the fx spot rates change). But then the currency changes can't be of benefit to you, as they sometimes might be if unhedged.

RolandFlagg

So what is good hedge against a weakening dollar? Gold?
Or do I just ride it out?

bowlhead99

RolandFlagg said:

So what is good hedge against a weakening dollar? Gold?
Or do I just ride it out?

If dollars are weakening then dollars will buy fewer bars of gold and fewer microsoft shares, so both the gold and microsoft shares may be worth more dollars, but will not necessarily be worth any more pounds. 

If you think dollars will not be worth very many pounds in future, then perhaps don't buy companies whose objective is to make lots of dollars from their customers - pick something else to invest in.  But most people will buy lots of different companies around the world so that they get a bit of everything, and the tech companies that make up the indexes you are looking at will generally have global revenues in any case, with the global revenues helping to drive their value (and perhaps having a greater influence on their share price because overseas can be a higher growth area for established US businesses).

Microsoft does get plenty of revenues from UK, Europe, Asia etc; $62bn of $126bn of 2019 revenues came from 'overseas'. So if dollars weaken, those GBP, Euro, Franc, Yen and Won etc that customers in other countries are willing to pay them will be worth lots more dollars than they were before, and if there are more dollars coming in the company will be worth more dollars, so that when you value the business in sterling it will still be worth a decent amount of money, despite dollars generally being worth fewer pounds for each dollar.

So an easy thing to do is not worry about it too much - if you did not want exposure to a US business and the currency fluctuations that go with it, as part of growing your overall wealth for living a long retirement in a global economy, you probably wouldn't be investing in global tech firms anyway.

Diplodicus

Relax. 
Even if $ weakens further, there would be multiple compensations for the long-term investor based in the U.K.
Don't hedge.

Thrugelmir

Diplodicus said:

Relax. 
Even if $ weakens further, there would be multiple compensations for the long-term investor based in the U.K.
Don't hedge.

What "compensations" are you thinking of ?

Diplodicus

1) A weak currency makes the services of companies with global reach more competitive.
More importantly..
 2) If the U.K. investor looks at his fortune in the round, almost certainly it will be heavily bound up in the value of £. An appreciating currency makes him richer in the world.