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ETF and Currency Effects - (USD & GBP) VWRL

Index tracking funds and ETFs
monabri
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ETF and Currency Effects - (USD & GBP) VWRL

#242815

Postby monabri » August 8th, 2019, 6:36 pm

Spurred on by another post regarding how much of the return on say VWRL is due to share performance and how much is due to currency movement - I found this link to the justETF site.

https://www.justetf.com/uk/etf-profile. ... ab=returns

This is the one for VWRL. My interpretation
-The effect of the fall in Sterling over the last 3 years has amplified returns to ~38% compared to the baseline USD currency of ~28%.
-IF, we get a good Brexit deal (I did use the word "IF"), Sterling might strengthen and the returns will not be as great.



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StOmer
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Re: ETF and Currency Effects - (USD & GBP) VWRL

#242865

Postby StOmer » August 8th, 2019, 10:16 pm

I've been looking at ETF's recently and found the justetf site a pretty good resource. I still haven't got my head around them completely but I'm thinking they could be a good option if I need to avoid stamp duty charges during current volatility and very tight discounts on Investment Trusts. I've mostly been looking at iShares, Vanguard and Lyxxor so will have to look at currencies etc before jumping into that ship

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Re: ETF and Currency Effects - (USD & GBP) VWRL

#255979

Postby MartynC27 » October 5th, 2019, 12:00 am

If you believe the pound will increase against the other major currencies you could move some of your money into hedged ETF's.
I have moved about 25% of my ETF portfolio into Hedged ETFs. These cost more but the Hedged Regional ETfs for US, Euro Area and Japan have lower charges than the all world Hedged iShares etf (IGWD).

Obviously if the pound falls I will lose out on this 25% of my portfolio.

MartynC

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Re: ETF and Currency Effects - (USD & GBP) VWRL

#256775

Postby MartynC27 » October 9th, 2019, 1:09 pm

Has any one else used Hedged ETFs or other investments in their portfolio and if so which one(s) ?

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Re: ETF and Currency Effects - (USD & GBP) VWRL

#265181

Postby mjcross1 » November 18th, 2019, 4:04 pm

The chart shows a comparison between three ETFs that all "track" the same index (the MSCI World Equity Index):
  • BLACK: URTH:US (tracker on the New York stock exchange in dollars)
  • BLUE line: HMWO:LN (tracker on the London stock exchange in pounds)
  • GOLD line: IGWD:LN (tracker on the London stock exchange in pounds hedged to dollars)
The global equity index is priced in dollars, so I'd contend that the real thing we are trying to track here is the BLACK line. To put it another way, as a passive investor that line reflects the globally diversified risk/return profile that we're trying to access.

As a UK-based investor I consider that the GOLD line (the hedged ETF) does a better job of tracking the index than the BLUE one (the unhedged ETF), because the latter tracks the index itself plus the day to day variations in the strength of Sterling versus the Dollar.

Speculating on FOREX (e.g. trying to predict how the pound might react after the election) is a perfectly valid form of making money. However I think that most people who buy a global equity tracker like HMWO are looking for a diversified investment in global equities - not a directional bet on the strength of sterling...

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Re: ETF and Currency Effects - (USD & GBP) VWRL

#265183

Postby mjcross1 » November 18th, 2019, 4:32 pm

MartynC27 wrote:Has any one else used Hedged ETFs or other investments in their portfolio and if so which one(s) ?


Yes @MartynC27 my portfolio is entirely ETFs with a global focus; and I hedge everything that tracks an index whose base currency isn't in GBP (for both equities and bonds).

For what it's worth, the main hedged ETFs I use are:

Global equities
  • IGWD
Bonds - US Govt, short duration index-linked
  • Ti5G
  • FLOS
Bonds - US Govt, short duration
  • IBTG
Bonds - Global Corporate, dollar denominated short duration
  • ZC1G
Bonds - Global Corporate, dollar denominated intermediate duration
  • LQGH
Bonds - Emerging Market, mixed short duration
  • UBXX
Hope that provides some food for thought...

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Re: ETF and Currency Effects - (USD & GBP) VWRL

#265302

Postby Gan020 » November 19th, 2019, 8:51 am

This is a really good topic and one that concerns me more than almost anything else.

As set out above if we get a good Brexit Sterling will strength and the value of all overseas assets will fall. Whether it's an ETF, stock or bond the outcome is the same.

I am particuarly concerned for a number of the "fixed income/HYP investors" who's basket of shares may be a good spread of the FTSE100 but isn't a good spread of forex risk. If cable increases 15% on Brexit, then most of the top 20 FTSE such as RDSB, BP., HSBC etc. will fall. Not by 15% of as their debts as well as assets are in foreign currency but the dividend stream will fall by 15% when re-patriated to sterling which in itself tends to drag the fall in share price lower than just the impact in the change in value of assets and liabilities. Some like LLOY based almost entirely on the UK will be beneficiaries of course. I appreciate the thread discusses ETF's but since they track the basket of underlying securities I trust it is ok to disgress a little.

So, if much of the returns since the referendum vote is due to the fall in Sterling, resolution of the matter to the upside will achieve the reverse.

Personally I believe there will be some form of deal and therefore I hold almost nothing with foreign earnings unless it is hedged. Every investment I have I have read the accounts to understand what the fund means by hedged and have found this can mean different things and doesn't always mean it is 100% hedged but only partially hedged.

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Re: ETF and Currency Effects - (USD & GBP) VWRL

#265341

Postby mjcross1 » November 19th, 2019, 10:11 am

Gan020 wrote:(...)If cable increases 15% on Brexit, then most of the top 20 FTSE such as RDSB, BP., HSBC etc. will fall. Not by 15% of as their debts as well as assets are in foreign currency(...)


The point you raise is a good one: FOREX variations can also affect GBP denominated UK based indices, if their constituents have siginificant overseas costs/earnings. Notably this is the case with the FTSE100.

If one wished to compensate this, one option might be to offset the FOREX effect by holding a proportionate amount of something like USGB (WISDOMTREE SHORT USD LONG GBP) that tracks the pound/dollar. That might be a bit sophisticated for most DIY investors though.

Personally however my preference is for a passive approach that avoids being overweight UK equities...

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Re: ETF and Currency Effects - (USD & GBP) VWRL

#265676

Postby Hariseldon58 » November 20th, 2019, 8:45 am

Betting on currency movements is very, very difficult, the professionals make a hash of it more often than not !

I must admit to having had a windfall in 2016 as I continued to remove a home bias from my portfolio.

My experience if the U.K. - US exchange rate has seen it go from $2.75 to near parity, my parents who previously lived in US have seen it move from more than $4.

I had always assumed a central value was around 1.65 but the trend does seem to be lower as time goes on, with occasional wild swings. (1985 we again approached near parity)

Given the effect of weak exchange rates on prices of goods here, cost of travel ( on a personal note, probably ½ my expenditure presently) I can’t see the point of hedging everything to the pound. ( the difference in interest rates is an additional factor that makes dollar hedging more expensive than it might initially appear )

In the long term all the currency effects will either wash out or we have a “new normal” I tend to work on having sufficient sterling assets to cover living expenses for a reasonable period and let everything else just happen.

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Re: ETF and Currency Effects - (USD & GBP) VWRL

#266253

Postby mjcross1 » November 22nd, 2019, 11:37 am

Hariseldon58 wrote:Betting on currency movements is very, very difficult (...) I can’t see the point of hedging everything to the pound.


Probably I've minsunderstood what you're saying here, but isn't the whole point of hedging precisely to take the betting on currency movements out of the equation?

Hariseldon58 wrote:In the long term all the currency effects will either wash out or we have a “new normal”

Ah perhaps my slightly different perspective on this reflects that I'm quite close to the drawdown phase, so I need to manage volatility a bit more tightly.

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Re: ETF and Currency Effects - (USD & GBP) VWRL

#266263

Postby Spet0789 » November 22nd, 2019, 12:01 pm

I think a lot of the discussion on this thread is massively over-thinking a quite simple point.

Over the long run, companies generate returns by providing products and services valued by customers across the world. We all consume products and services. On any given day, you see a “sticker price” both for the companies (shares) and for the things you consume which is in some functional currency. GBP for most of us. But it’s a huge mistake to assume that over the medium or long term that functional currency is anything other than arbitrary.

Personally, I ignore currency completely in my investment decisions and try to diversify my assets. If I were to take a currency view I would be short GBP as I consider it inevitable that relative to the world average, we will become less wealthy over time as a country and that will be reflected by a structural weakening of our currency.

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Re: ETF and Currency Effects - (USD & GBP) VWRL

#266312

Postby hiriskpaul » November 22nd, 2019, 3:12 pm

I don't currency hedge my equities or bonds, although I do hold a fair amount of GBP cash and most of my bonds are GBP. Currency hedging adds to costs and can at times actually increase portfolio volatility. There is no return premium for currency hedging a portfolio, quite the opposite as it just adds to costs. I would consider currency hedging if I held a lot of foreign currency bonds though.

Here is a Vanguard paper on the topic: https://personal.vanguard.com/pdf/ISGPCH.pdf

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Re: ETF and Currency Effects - (USD & GBP) VWRL

#266370

Postby Hariseldon58 » November 22nd, 2019, 5:58 pm

@MJCROSS1
Probably I've minsunderstood what you're saying here, but isn't the whole point of hedging precisely to take the betting on currency movements out of the equation?


Personally I strongly agree with SPET0789 and HIRISKPAUL, the currency effects are there, you can't eliminate the issue, by hedging you are taking a position, one that has costs...and risks. My investment portfolio has relatively low exposure to sterling but in other respects, future state pension, home, cash assets, a commercial property I have a lot of sterling exposure too.

With respect to drawdown, I have been in drawdown since 20017 and hope to be so for many decades to come ! I see no reason to worry about the exchange rate over that period, sterling will rise and fall ( and fall.. :D )

There are strong arguments that when in drawdown, that the income you draw should have some margin for the variability of returns, such that the currency effect is one such variable, not of a magnitude to affect your spending plans and lifestyle dramatically, if it does, then I might suggest you need more capital or your desired drawdown rate is already too high.

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Re: ETF and Currency Effects - (USD & GBP) VWRL

#269016

Postby hiriskpaul » December 4th, 2019, 11:34 am

I had a look at currency effects in the total return version of the MSCI World index a while ago, but forgot to post on what I found. I looked at unhedged, or dollar denominated, and perfectly GBP hedged behaviour since the pound left Bretton Woods in 1971 and starting floating against the dollar.

During that time, the unhedged return beat the hedged return by 85% due to the drop in the pound against the dollar, but I think we should ignore that as it does not really tell us anything about the future direction of GBP/USD, although we might have a personal view. More interesting is the volatility. Over the whole period, the volatility of the unhedged index is slightly larger at 15.0% compared with 14.7%. So hardly anything in it. The volatility picture does vary with time though. For example, the last 10 years shows the unhedged index to be much less volatile at 10.9% vs 12.9%. I found that quite surprising given the recent Brexit induced volatility in the pound, but it is correct. Time series can often combine in strange ways due to correlation.

Looking at the large nominal drawdowns of the last 48 years I think does not really show any definitive advantage of hedged or unhedged. The worst peak to trough drawdown was during the GFC. The hedged index dropped by 54%, bottoming out in Feb 2009. The unhedged version did much better, bottoming out down 33% as the crisis also hit sterling. Prior to that, the dot-com boom/bust ended with the hedged index down 46%, but the unhedged down 49%. The 1974 oil crisis saw the unhedged index down 39%, hedged down 40%. The drawdown in 1990 saw the hedged index drop 24%, but the unhedged a much larger 35% as GBP/USD rose 16% during the year.

Overall I cannot see a definitive reason to hedge or not hedge, except maybe for short or long term views on the direction of the pound. Perhaps go 50/50?

As hedging costs more I will stick to unhedged.

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Re: ETF and Currency Effects - (USD & GBP) VWRL

#269067

Postby hiriskpaul » December 4th, 2019, 4:33 pm

One thing I forgot to mention is that changes in the MSCI World Index and GBP/USD rate are uncorrelated (correlation coefficient 0.005 since end of Bretton Woods). This is the reason why there is virtually no difference in volatility between hedged and unhedged versions of the index.

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Re: ETF and Currency Effects - (USD & GBP) VWRL

#275871

Postby Cookie » January 7th, 2020, 11:07 pm

My simplistic view is £ to $ has been sinking for long time, Brexit has some impact and there might be mild correction. USA economy is doing far better than UK and likely to continue too in the next 5-10yrs (I am a Brexit pessimist). The $ is seen as the universal standard. Therefore for foreseeable future (as long as anyone can see), I will hold majority of my investments in $


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