iShares ETFs after Deal or No Deal Brexit

[wickham]

I have a lot of my investments in Dublin based iShares.
Can you think of any disadvantages after a Deal or No Deal Brexit?

Such as
Transfer costs for dividends from EU to UK.
Additional costs of currency fluctuations or conversion from Euros to £ for dividends (they are valued in £).
My investments are held by UK institutions but the iShares are presumably registered in a Dublin institution so would there be any transfer costs if iShares are sold?
I pay UK tax on dividends, would there be any change like EU income tax before payment?
I pay CGT where necessary but I presume no changes there after Brexit from an EU perspective.
Any other effects?

[hiriskpaul]

I cannot think of anything that might be of concern to ETF holders, even if we had the most chaotic no deal Brexit imaginable. *

Dividends from ETFs that are domiciled in Ireland are not subject to withholding tax. This has nothing to do with EU membership though, it is just that Ireland has chosen not to levy a tax. Should they choose to change this they would quickly find ETF providers would domicile their funds elsewhere, such as in the UK or Luxembourg.

With respect to currency conversions, this is a matter for your broker, not the ETF provider. ETFs pay dividends in the underlying currency used by the fund, typically pounds where the underlying is solely UK shares/bonds, Euros for European shares/bonds and US dollars for everything else. It is then up to your broker to convert the dividends to pounds, or not if they offer the facility to hold foreign currency, as many do. The EU has nothing to do with foreign exchange and none of this should change post Brexit.

There is no "EU income tax". Provided an offshore fund has UK reporting status, as most iShares ETFs domiciled in Ireland do, you will continue to pay UK income tax on dividends and UK CGT on capital gains. For any offshore fund, Irish domiciled or otherwise, that does not have UK reporting status, you will pay income tax on capital gains. Again, I see no reason why any of this should change post Brexit as these rules hold now for non-EU domiciled funds/ETFs.

* Not with the ETF structure anyway. Underlying shares/bonds could become very volatile for a while!

[wickham]

That's very reassuring.

[Abadi]

If you have Shares / iShares in another currency that are not 'hedged' then a 'No Brexit' or Peoples Vote or switch to a Norway Plus type deal could see GBP rise significantly AND would have a negative impact your non gbp holdings.

I have purchase the ETFS Short USD Long GBP (ticker = USGB) in order to hedge my own Nasdaq listed holding.

[Lootman]

If you have Shares / iShares in another currency that are not 'hedged' then a 'No Brexit' or Peoples Vote or switch to a Norway Plus type deal could see GBP rise significantly AND would have a negative impact your non gbp holdings.

I have purchase the ETFS Short USD Long GBP (ticker = USGB) in order to hedge my own Nasdaq listed holding.

Depending which NASDAQ holdings they are, it might be worth seeing which countries they derive their revenues from. At least some of them make most of their profits outside the US, in which case it is not the GBP/USD rate that you are ultimately exposed to, but rather the USD versus those other currencies.

I've always held the view that for equities (but not for bonds) currency hedging is unnecessary. If a country's currency declines then its businesses become more competitive internationally, and profits should do better. Conversely a country with an appreciating currency might see depressed levels of profitability.

So in a sense the situation is self-correcting. That said, betting against sterling has worked out well over the last dozen years or so, and part of the appeal of investing overseas is the boost you can get from sterling's long-term decline.

[Abadi]

Just addressing the fact that if GBP jumps 10% then your USD stock (regardless of what they do) will probably be worth 10% less.

[Lootman]

Just addressing the fact that if GBP jumps 10% then your USD stock (regardless of what they do) will probably be worth 10% less.

As would many UK shares that derive much of their earnings overseas or who operate in sectors that are dollar-denominated e.g. BP, Royal Dutch, BHP, Rio Tinto, Glaxo, Diageo, Unilever etc

The relationship between equity values and currencies is not a simple one, especially from the perspective of a small island with multi-national companies.

Also USD is a safety currency. People flock to dollar assets when markets are in turmoil. So if shares are declining, I'd expect sterling to do worse than the dollar. That was certainly the case in 2007 to 2010, when the pound lost a good 20% of its value versus the dollar. And that was before it lost more because of Brexit.

[colin]

In 2007 as US interest rates fell with falling house prices 1 pound bought 2 dollars, highest rate for decades. In a US recession dollar will fall as they lower interest rates.
https://www.poundsterlinglive.com/bank-of-england-spot/historical-spot-exchange-rates/gbp/GBP-to-USD-2007

[Abadi]

Just addressing the fact that if GBP jumps 10% then your USD stock (regardless of what they do) will probably be worth 10% less.

As would many UK shares that derive much of their earnings overseas or who operate in sectors that are dollar-denominated e.g. BP, Royal Dutch, BHP, Rio Tinto, Glaxo, Diageo, Unilever etc

As you can probably already see, the exchange rate has moved 4% already.
This will have had a significant impact on any non hedged non gbp stocks valuations in your portfolio.

[PrefInvestor]

Hi All, I have been giving some thought to currency hedging just lately. I probably have 15-20% exposure to foreign currencies through overseas investments in my portfolio, mostly USD but some EUR. I have a few ETFs holding overseas investments but none are currency hedged. I took a look at USGB as a result of an earlier post in this thread but I assume to fully hedge my exposure I would need to buy £N,000 worth, where that figure is the effective amount of my total portfolio exposure to that currency. That’s a lot of money to find that could be invested elsewhere though, so doesn’t immediately look attractive. With 15-20% portfolio exposure to foreign currencies a 10% rise in the GBP might cost me 1.5-2% of the portfolio value, which while significant isn’t exactly a disaster – and it is far from a certainty that it will happen.

I have previously thought about hedging against falls in the FTSE using short leveraged ETFs and came to much the same conclusion. To be fully hedged you need to commit significant funds AND of course there are other risks with these short leveraged ETFs which means that holding them for a protracted period isn’t a good idea.

ATB

Pref