S&P 500 ETF... Hedged or Unhedged?

jacko74

I hold VUAG which last year made approximately +8% whilst the market it's supposed to track, the S&P 500, made +18%.

I'm guessing this huge discrepancy is due to the strength of GBP v USD.

IGUS which is a hedged S&P 500 tracker made +18% last year, matching the S&P exactly.

Is there any reason why I shouldn't switch to a hedged S&P 500 tracker? (I realise a hedged ETF comes with slightly higher fees)

PixelPound

What platform? G500 has TER of 0.07%

jacko74

PixelPound said:

What platform? G500 has TER of 0.07%

I hold it on Hargreaves Lansdown, my query isn't really regarding the comparitve fees between hedged v unhedged, its more a wider question of what are the disadvantages of a hedged ETF?

I realise currencies can fluctuate but it feels to me like the weak USD v GBP could remain in place for the foreseeable future.

InvesterJones

I used currency hedging in two scenarios: 1. For overseas bond funds which are part of my volatility reduction strategy. 2. As short term currency speculation in fun funds - I bought a hedged S&P500 fund when the pound was below 1.20 dollars and switched it to the un-hedged version when it neared 1.35.

If you are convinced we'll see another strengthening (not just current values remaining) in the pound vs the dollar then sure, it makes sense for a speculative punt (do you also have your eye on the fed chair pick I wonder..? ). But it works both ways - hedged funds would have performed poorly the last decade when the pound weakened - something that has actually sheltered UK investors from the wider UK slowdown in some ways. If playing the long game then I prefer to look at current valuations rather than guess what might happen in the future.

PensionPotInvestor

jacko74 said:

PixelPound said:

What platform? G500 has TER of 0.07%

I hold it on Hargreaves Lansdown, my query isn't really regarding the comparitve fees between hedged v unhedged, its more a wider question of what are the disadvantages of a hedged ETF?

I realise currencies can fluctuate but it feels to me like the weak USD v GBP could remain in place for the foreseeable future.

It's good question, and one I grapple with a lot. Sorry to sound pedantic, but this is not about whether the USD remains weak, but whether it continues to weaken, which is what I'm sure you meant. Generally speaking no one can predict medium to long term FX movements, or they'd be a billionaire by now (Ok, so George Soros is! ), so I often split the investment 50:50 between hedged and unhedged, if I can. This assumes the inbuilt cost of hedging is not too high - which I work out by comparing historical charts of the hedged investment to say an index (in this case S&P Total return index). Having said that about predicting FX rates, there is no doubt Trump is unwittingly and deliberately devaluing the dollar right now, so there are some good grounds for hedging, but the FX rate will be very volatile so expect twists and turns. Also, you may argue that Starmer is unwittingly devaluing the pound too ( :)so this kind of thing is very hit and miss, which is why 50:50 is often the best policy.

Exodi

jacko74 said:

I hold VUAG which last year made approximately +8% whilst the market it's supposed to track, the S&P 500, made +18%.

Maybe it's because I haven't had my coffee yet, but this has irked me - what do you mean 'the market it's supposed to track'? Is that to imply a secret conspiracy where it doesn't really track the S&P500?

jacko74 said:

I'm guessing this huge discrepancy is due to the strength of GBP v USD.

No need to guess, this information is readily available:


Which is the reason for the discrepancy you describe:

jacko74 said:

Is there any reason why I shouldn't switch to a hedged S&P 500 tracker?

Depends if you think the pound will further strengthen against the dollar. I fear you might be looking at this through rose-tinted glasses with the benefits of hindsight.

If you were to remove the glasses, and look beyond the last year, perhaps to 5 years you see a different story.


This in turn causes this:


I'll just say everything appears obvious in hindsight.

That said, hedging is a valid risk management strategy - though it would depend how pessimistic/optimistic you are of the UK's future. While we see and hear things are bad here, reading foreign newspapers indicate that most countries aren't faring much better. For example, we talk on this forum about the triple lock eventually bankrupting the country - but I think many don't realise France is way worse than us in this regard (where pensioners' average incomes now exceed that of working-age adults).

dunstonh

Is there any reason why I shouldn't switch to a hedged S&P 500 tracker? (I realise a hedged ETF comes with slightly higher fees)

When it goes down again, the hedged version will underperform the unhedged version.   So, your timing may not be ideal unless you feel the dollar is going to drop again.

I switched to hedged back when there was almost parity as I felt it wouldn't last but switched back to unhedged when it got to around 1.27.

PixelPound

Also depends on your investment horizon. It is easy to just look at the headlines of the past year and see how much better the hedge would have done, but if investing for 20, 30,... years would fluctuations even out? 

SnowMan

Because of purchasing power parity currency fluctuations will broadly even out over time and so hedging isn't really necessary/desirable in any long term investing strategy. Unless you can predict short term currency fluctuations; but good luck with that. Consequently local returns and returns for a UK investor in that same geographic area will be very close (but not identical) over time

Have a look for example at this chart from this publication on page 38 which gives an idea as to this effect. This is from a US investor perspective but of course the same would apply for a UK investor.

 

leosayer

A stronger USD will likely lead to higher inflation and interest rates in the UK. An unhedged US fund can help offset that. 

Of course, a stronger GBP will have the opposite effect.

Albermarle

That said, hedging is a valid risk management strategy - though it would depend how pessimistic/optimistic you are of the UK's future. While we see and hear things are bad here, reading foreign newspapers indicate that most countries aren't faring much better. For example, we talk on this forum about the triple lock eventually bankrupting the country - but I think many don't realise France is way worse than us in this regard (where pensioners' average incomes now exceed that of working-age adults).

For the latter part of my career, I worked for a European company and had a lot of contact with colleagues doing the same job in other countries.
They all complain about the same things : tax; traffic congestion; their government; bureaucracy ( much worse usually than in the UK)  the EU/Brussels etc etc .
I also had contact with customers and people from other depts., in the UK, and other European countries.
The main noticeable difference about the UK, was that we are more insular, and less aware/concerned about what happens in other European countries. Probably as we have no land borders, and the lack of a need to learn any foreign languages.