Trying to understand the impact of currency costs for a fund denominated in USD vs GBP?

isayhello

While browsing some funds on iWeb I've come across the following - iShares S&P 500 Information Technology Sector UCITS ETF GBP. I've also found a version of this denominated in USD.

The annualised 5yr difference in performance is 30.78% for the USD and 29.50% for GBP.

Is it still worth getting the GBP version to avoid certain fees even if there is a small gain in performance like in this example?

masonic

Why do you think such a small difference will be consistent?

isayhello

I don't think that, I just wondered what the pro's and con's of both are, I'm new to this but I've heard some platforms charge a currency fee but if the platform doesn't then is the USD a better option?

Actually shouldn't the performance be identical, why does it vary if they invest in the same things?

DireEmblem

Buy the UK version if that's what you are after.  The small difference I would suspect is a currency conversion error.  You are talking what 1.28% over 5 years so 0.24% a year.  That or have you looked at the OCF on both?

GeoffTF

isayhello said:

While browsing some funds on iWeb I've come across the following - iShares S&P 500 Information Technology Sector UCITS ETF GBP. I've also found a version of this denominated in USD.

The annualised 5yr difference in performance is 30.78% for the USD and 29.50% for GBP.

Is it still worth getting the GBP version to avoid certain fees even if there is a small gain in performance like in this example?

The performances of a USD denominated fund and a GBP denominated version of the same fund will be different unless the two currencies track one another perfectly, which they certainly do not. If you want to compare the performance of a fund denominated in USD with that of a fund denominated in GBP, you can do that by converting the USD price at both the beginning and end of the time period to GBP. You probably cannot buy the USD version in the UK anyway.

maxsteam

If you are in UK, then your life is based around GBP. You can invest in a USD fund and you might do well, you might not, but you are taking a risk by investing in something that's not in GBP.

Having said that, almost every FTSE company has significant USD exposure.

masonic

isayhello said:

Actually shouldn't the performance be identical, why does it vary if they invest in the same things?

It is, to the nearest 0.1%, but there will be slight differences due to the difference in how uninvested cash is received and held within the funds:

The data provided by iWeb is probably not comparable on a like for like basis.

EdSwippet

isayhello said:

While browsing some funds on iWeb I've come across the following - iShares S&P 500 Information Technology Sector UCITS ETF GBP. I've also found a version of this denominated in USD.

This article explains (with algebra!) why fund denomination currency doesn't matter:

Currency risk and ETFs, trackers, and other funds - Monevator.com

GeoffTF

EdSwippet said:

isayhello said:

While browsing some funds on iWeb I've come across the following - iShares S&P 500 Information Technology Sector UCITS ETF GBP. I've also found a version of this denominated in USD.

This article explains (with algebra!) why fund denomination currency doesn't matter:

Currency risk and ETFs, trackers, and other funds - Monevator.com

But that does not appear to be the issue here. Suppose that the value of ETF in $ terms is the same at the end of the time period as it was at the beginning. Suppose also that $1 is worth £1 at the beginning of the time period, and $1 is worth £2 at the end of the time period. The growth of the fund over the period in $ terms is 0%. The growth of the same fund over the period in £ terms is 100%.

Currently, UK based retail investors are not all allowed to buy US based ETFs anyway, unless they have KIIDs, which none of them do.

Linton

GeoffTF said:

EdSwippet said:

isayhello said:

While browsing some funds on iWeb I've come across the following - iShares S&P 500 Information Technology Sector UCITS ETF GBP. I've also found a version of this denominated in USD.

This article explains (with algebra!) why fund denomination currency doesn't matter:

Currency risk and ETFs, trackers, and other funds - Monevator.com

But that does not appear to be the issue here. Suppose that the value of ETF in $ terms is the same at the end of the time period as it was at the beginning. Suppose also that $1 is worth £1 at the beginning of the time period, and $1 is worth £2 at the end of the time period. The growth of the fund over the period in $ terms is 0%. The growth of the same fund over the period in £ terms is 100%.

Currently, UK based retail investors are not all allowed to buy US based ETFs anyway, unless they have KIIDs, which none of them do.

The effect of currency movements on fund prices depends on what currency the underlying investments use rather than the currency of the fund. If, for example, your $ denominated ETF invests in UK Government bonds then the ETF's price in $s when converted to £s should always match the £ price of the bonds ignoring currency conversion costs.  You should not be able to make (or lose) significant money by switching between the same funds denominated in different currencies.

With equity it can be more complicated than that since currency movements can affect shares in their native currency.  For example a UK company could do most of its business exporting in $s.  If the £ falls against the $ the UK company could increase in value in £ terms since its $ income would be worth more.   

Voyager2002

GeoffTF said:

Currently, UK based retail investors are not all allowed to buy US based ETFs anyway, unless they have KIIDs, which none of them do.

That is true but irrelevant. There are plenty of dollar-denominated ETFs traded in London (for example I hold the iShares Healthcare Innovation in US dollars).