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

masonic

The thing is, when you currency hedge, it is just currency speculation. When you buy a conventional S&P500 tracker, you become the beneficial owner of shares in the underlying companies in the index, and their revenue streams. The fact that USD weakens, so these look inflated in dollar terms as compared to pounds sterling is immaterial to the long term investor. You buy the underlying companies to own them for their future prospects. If you do choose to speculate on currency movements, then the time to do so would be when the exchange rate is near an extreme and your odds of winning the gamble are maximised.

VUAG went up 18% in USD terms and 8% in GBP terms, just like the S&P500 itself.

IGUS went up 30% in USD terms and 18% in GBP terms, giving a better return, so in that year the gamble paid off. But GBP:USD is now towards the top end of its 10 year trading range, having risen 20% from its 2022 low.

Possibly the more salient question is if the S&P500 is the right index to be tracking right now.

PensionPotInvestor

Hi Exodi, no conspiracies. It costs the provider of hedged investments to actually hedge (and they obv pass that cost on) so if you own, for example, a hedged SnP 500 ETF, it is likely to do slightly worse than the S&P Index over time (who's performance is the equivalent of owning the index in USD (as opposed to GBP)). I checked this a while back with a hedged Gold etf before deciding whether it was worth hedging. Hope that makes sense.

Exodi

PensionPotInvestor said:

if you own, for example, a hedged SnP 500 ETF, it is likely to do slightly worse than the S&P Index over time (who's performance is the equivalent of owning the index in USD (as opposed to GBP)).

The S&P500 Index (which you can't invest in) is not the same as an S&P500 Index Fund (which you can invest in and tries to replicate the index).

To be clear A USD denominated S&P500 Index fund is also likely to do slightly worse than the S&P500 Index over time.

I don't know if this is confusion on your end, or a typo. Giving the benefit of the doubt, if your point was that a USD hedged S&P500 ETF denominated in GBP would underperform an unhedged S&P500 ETF denominated in USD, I'd suggest the costs of hedging major currencies like these will be relatively negligible, or to put it another way, I wouldn't consider it in the strategic consideration of whether someone should hedge their investments or not.

PensionPotInvestor said:

I checked this a while back with a hedged Gold etf before deciding whether it was worth hedging. Hope that makes sense.

Sounds a lot like letting the tail wag the dog.

Peoples decisions to hold hedged or unhedged investments aren't (or shouldn't be) based on the insignificant additional costs involved. It should be considered as a tool against currency fluctuation.

Diversification or risk management is the name of the game. You could appreciate it would be daft if my investment strategy was solely driven by which fund charged the lowest fees, with no consideration for asset allocation, number of holdings, demographic, etc.

saajan_12

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.

You've correctly identified the driver of the 8% v 18% as the FX. However I would then leave that comparison there and NOT try to speculate on the future of FX. If the general sentiment including experts thought the exchange rate was low / high then they would buy / sell and ultimately the rate would match consensus. To make money from this  your prediction has to be right and better than the consensus - otherwise you could lose more money. 

The question is really whether you want to HEDGE ie be immune to currency fluctuations, not whether you will make money from it. With a GBP based investment, you're concentrated on GBP risk. However that may be appropriate if your future expenses are also going to be GBP based. If you're likely to move abroad etc then you may want to diversify into USD risk. 

masonic

saajan_12 said:

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.

You've correctly identified the driver of the 8% v 18% as the FX. However I would then leave that comparison there and NOT try to speculate on the future of FX. If the general sentiment including experts thought the exchange rate was low / high then they would buy / sell and ultimately the rate would match consensus. To make money from this  your prediction has to be right and better than the consensus - otherwise you could lose more money. 

The question is really whether you want to HEDGE ie be immune to currency fluctuations, not whether you will make money from it. With a GBP based investment, you're concentrated on GBP risk. However that may be appropriate if your future expenses are also going to be GBP based. If you're likely to move abroad etc then you may want to diversify into USD risk. 

It can be a bit deceptive in relation to GBP denominated investments. When looking at the FTSE100, many of the companies report earnings in pounds, but generate most of their sales abroad, so swings in exchange rates can amplify or dampen revenue, valuation and hence share price.

leosayer

masonic said:

saajan_12 said:

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.

You've correctly identified the driver of the 8% v 18% as the FX. However I would then leave that comparison there and NOT try to speculate on the future of FX. If the general sentiment including experts thought the exchange rate was low / high then they would buy / sell and ultimately the rate would match consensus. To make money from this  your prediction has to be right and better than the consensus - otherwise you could lose more money. 

The question is really whether you want to HEDGE ie be immune to currency fluctuations, not whether you will make money from it. With a GBP based investment, you're concentrated on GBP risk. However that may be appropriate if your future expenses are also going to be GBP based. If you're likely to move abroad etc then you may want to diversify into USD risk. 

It can be a bit deceptive in relation to GBP denominated investments. When looking at the FTSE100, many of the companies report earnings in pounds, but generate most of their sales abroad, so swings in exchange rates can amplify or dampen revenue, valuation and hence share price.

This is a very good point and the same applies to US companies which trade in many different countries. Do those companies all hedge / convert back to USD? 

masonic

leosayer said:

masonic said:

saajan_12 said:

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.

You've correctly identified the driver of the 8% v 18% as the FX. However I would then leave that comparison there and NOT try to speculate on the future of FX. If the general sentiment including experts thought the exchange rate was low / high then they would buy / sell and ultimately the rate would match consensus. To make money from this  your prediction has to be right and better than the consensus - otherwise you could lose more money. 

The question is really whether you want to HEDGE ie be immune to currency fluctuations, not whether you will make money from it. With a GBP based investment, you're concentrated on GBP risk. However that may be appropriate if your future expenses are also going to be GBP based. If you're likely to move abroad etc then you may want to diversify into USD risk. 

It can be a bit deceptive in relation to GBP denominated investments. When looking at the FTSE100, many of the companies report earnings in pounds, but generate most of their sales abroad, so swings in exchange rates can amplify or dampen revenue, valuation and hence share price.

This is a very good point and the same applies to US companies which trade in many different countries. Do those companies all hedge / convert back to USD? 

I'd imagine that large US companies have a better chance of pricing contracts, especially B2B / longer term ones, in USD in parts of the world. But it is also common to manufacture goods overseas, so they may have local currency expenses and income in countries like China.

In theory currency risk in this context would be temporary, providing goods and services can be re-priced, which is where having an economic moat is a huge benefit.