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

GeoffTF

We may just be muddying the issue here. I searched for "iShares S&P 500 Information Technology Sector" in Google. The only hit was for IITU, with various brokers, e.g;

https://www.hl.co.uk/shares/shares-search-results/i/ishares-v-plc-s-and-p-500-info-tech-sec-usd-acc

That fund is quoted in GBP on the London Stock Exchange. I could not find a USD denominated share class. The OP said that he uses iWeb.  With iWeb, you have to pay a 1.5% foreign exchange commission to buy shares quoted in USD and another 1.5% when you sell them.

EdSwippet

GeoffTF said:

We may just be muddying the issue here. I searched for "iShares S&P 500 Information Technology Sector" in Google. The only hit was for IITU, ...

IITU's USD listing in London is IUIT. You can find this information in the fund's factsheet. It is under the "Dealing Information" heading.

IITU and IUIT are both facets of the exact same underlying fund; that is, ISIN IE00B3WJKG14. They have different trading currencies, but otherwise are the same thing. Which is I think why the comparison chart posted earlier by Masonic showed no difference at all between them in performance; a comparison of some apples to the same apples!

The underlying fund's denomination (base) currency is USD, but again this has no effect on investor results. The denomination currency is just a performance measuring yardstick. The percentage change is all that matters. A fund could be denominated in anything -- USD, GBP, JPY, goats, or Mars bars.

The answer for the OP as a GBP investor is to use the GBP traded version. Converting GBP to USD to buy the USD traded version, and vice versa on sale, simply adds entirely unnecessary forex costs to the process of investing in the exact same assets.

isayhello

GeoffTF said:

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.

@GeoffTF If the fund appears in the list on the platform how do you know if you can or cannot buy it?

isayhello

maxsteam said:

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.

Why is the extra risk there for investing in USD? Are USD and GBP not equally reliable and safe currencies to use?

isayhello

EdSwippet said:

The answer for the OP as a GBP investor is to use the GBP traded version. Converting GBP to USD to buy the USD traded version, and vice versa on sale, simply adds entirely unnecessary forex costs to the process of investing in the exact same assets.

Ok taking this as the answer to my question then, that with iWeb the 1.5% currency charge by iWeb as mentioned by another poster would make it pointless to buy the same fund in another currency.

Also I'll deduce from this then that even if there was no forex charge at all, then as the funds invest in the same things then the currency doesn't matter and I should stick with GBP as a UK investor.

GeoffTF

isayhello said:

EdSwippet said:

The answer for the OP as a GBP investor is to use the GBP traded version. Converting GBP to USD to buy the USD traded version, and vice versa on sale, simply adds entirely unnecessary forex costs to the process of investing in the exact same assets.

Ok taking this as the answer to my question then, that with iWeb the 1.5% currency charge by iWeb as mentioned by another poster would make it pointless to buy the same fund in another currency.

Also I'll deduce from this then that even if there was no forex charge at all, then as the funds invest in the same things then the currency doesn't matter and I should stick with GBP as a UK investor.

If you have a future liability priced in GBP, funding it with a very low risk US Treasury Bond would carry the risk that the pound might rise against the dollar. You would not face the same risk if you invested in a UK Treasury Bond (Gilt). Global bond funds can eliminate (or at least greatly reduce) the currency risk by hedging with futures contracts.

Equity prices are much more volatile then bond prices (i.e they have more unpredictable movements up and down). The additional volatility from currency movements does not make a big difference to the overall volatility of equities.

Vanguard's research suggests that it is best to hedge bonds but not equities in a globally diversified portfolio. That is mostly what they do in their LifeStrategy and Target Retirement funds.

masonic

isayhello said:

EdSwippet said:

The answer for the OP as a GBP investor is to use the GBP traded version. Converting GBP to USD to buy the USD traded version, and vice versa on sale, simply adds entirely unnecessary forex costs to the process of investing in the exact same assets.

Ok taking this as the answer to my question then, that with iWeb the 1.5% currency charge by iWeb as mentioned by another poster would make it pointless to buy the same fund in another currency.

Also I'll deduce from this then that even if there was no forex charge at all, then as the funds invest in the same things then the currency doesn't matter and I should stick with GBP as a UK investor.

Correct. It is worth comparing the two currency classes because sometimes there might be other differences that lead to performance differences (such as management charges), but do this using a reliable source such as Trustnet and not using figures from a platform which might not relate to the same timepoints. In this case there is clearly no reason not to go GBP.

GeoffTF

isayhello said:

EdSwippet said:

The answer for the OP as a GBP investor is to use the GBP traded version. Converting GBP to USD to buy the USD traded version, and vice versa on sale, simply adds entirely unnecessary forex costs to the process of investing in the exact same assets.

Ok taking this as the answer to my question then, that with iWeb the 1.5% currency charge by iWeb as mentioned by another poster would make it pointless to buy the same fund in another currency.

Also I'll deduce from this then that even if there was no forex charge at all, then as the funds invest in the same things then the currency doesn't matter and I should stick with GBP as a UK investor.

If there were guaranteed to never be any forex costs at all, then it would not matter. In the world as it is, stick to GBP denominated funds. Always double check very carefully what you are investing in. I am sure iWeb would love you to buy the USD denominated version.

masonic

GeoffTF said:

isayhello said:

EdSwippet said:

The answer for the OP as a GBP investor is to use the GBP traded version. Converting GBP to USD to buy the USD traded version, and vice versa on sale, simply adds entirely unnecessary forex costs to the process of investing in the exact same assets.

Ok taking this as the answer to my question then, that with iWeb the 1.5% currency charge by iWeb as mentioned by another poster would make it pointless to buy the same fund in another currency.

Also I'll deduce from this then that even if there was no forex charge at all, then as the funds invest in the same things then the currency doesn't matter and I should stick with GBP as a UK investor.

If you have a future liability priced in GBP, funding it with a very low risk US Treasury Bond would carry the risk that the pound might rise against the dollar. You would not face the same risk if you invested in a UK Treasury Bond (Gilt). Global bond funds can eliminate (or at least greatly reduce) the currency risk by hedging with futures contracts.

Equity prices are much more volatile then bond prices (i.e they have more unpredictable movements up and down). The additional volatility from currency movements does not make a big difference to the overall volatility of equities.

Vanguard's research suggests that it is best to hedge bonds but not equities in a globally diversified portfolio. That is mostly what they do in their LifeStrategy and Target Retirement funds.

Equities do not involve a fixed sequence of cash returns, they confer ownership of shares in companies. Therefore hedging would be inappropriate and amount only to currency speculation. The simplest way to view it is that the return from bonds varies proportionately with exchange rate movements, while the return from a business selling goods and services is broadly independent of exchange rate movements (crudely, the goods and services vary in price to compensate).

Important, though, to make a distinction between using different trading currencies and hedging! Clearly this GBP ETF is not hedged.

isayhello

Hmm but in a situation with even with a GBP version of a fund that say invests in the s and p 500, are the underlying investments not bought in dollars and still incurring the forex charge?