Buying short term US treasuries in share ISA

[neorullz]

I am a UK-based individual investor and my investment is confined to the annual share ISA limit. I need some advice on investing in the US 1-3 years treasuries. This is to diversify my portfolio to hedge against the probable further sterling deterioration against the dollar.

I could have converted some of my savings from sterling to USD using a foreign currency account (but the USD accounts in UK barely give any return) and converting and reconverting results in exchange losses. What I ideally would like is to have some of my savings in USD as 'liquid', in a Share ISA account which can be converted to GBP easily when I needed to, so I was thinking whether a short term US government debt is a decent place to park in the short term, as I understand it gives a return of slightly over 4% at the moment

I know what I have written so far may put me in the "novice" camp, but if I were to take a view that,

a. UK inflation is going to rise for the next few years,

b. Sterling is going to go below parity

c. US inflation is going to ease and

d. US economy is going to enter into recession,

(with strictly keeping the caveat emptor in mind) would you advice this move to have some exposure to short term US government debt (for not more than 2-3 years)?

I guess, with UK Share ISA, the ETFs such as ISHARES USD TREASURY BOND 1-3 YR is the best option, or is there an alternative?

My worst case bottom line is that by the end of it I should suffer no more than 5% capital loss in GBP terms. Rest everything is an added bonus. With that in view, is the ISHARES ETF above a reasonable choice?

As I have never dabbled with investing in bonds so far (I have to start somewhere, don't I) I just wanted to know what are the pitfalls I need to watch out for? Thanks.

[mc2fool]

I could have converted some of my savings from sterling to USD using a foreign currency account (but the USD accounts in UK barely give any return) and converting and reconverting results in exchange losses. What I ideally would like is to have some of my savings in USD as 'liquid', in a Share ISA account which can be converted to GBP easily when I needed to...

Welcome to the Lemon Fool.

I'll leave the crystal ball gazing aspects of your post to others, but on the above, you can't hold any currency other than GBP in an ISA, that's simply ISA "law".

That doesn't mean you can't have USD based or USD denominated investments in your ISA, it just means you have to pay for them in GBP, and that means you should look to minimise exchange fees.

For example, the iShares $ Treasury Bond 1-3yr ETF you cite is a USD based investment but it has two sub-classes* listed on the London Stock Exchange, IDBT which is USD denominated, and IBTS which is GBP denominated. As you can only hold GBP in an ISA if you buy IDBT then your broker will convert your GBP into USD to buy it, and hit you with exchange fees for the pleasure (and again on the way back when you sell it). So, simply buy IBTS and avoid that.

* of the USD distributing class. The USD accumulation class has only a USD denominated sub-class.

[neorullz]

Thanks mc2fool. That helped.

Just another related question - if I were to go for IBTS, wouldn't that implicitly include the USD-GBP conversion rate too, given the IBTS fund still need to buy the US treasuries and then hold as GBP fund? I guess my real question is, why do they have 2 sub-classes?

Apologies, if it came across as a silly question.

[mc2fool]

Thanks mc2fool. That helped.

Just another related question - if I were to go for IBTS, wouldn't that implicitly include the USD-GBP conversion rate too, given the IBTS fund still need to buy the US treasuries and then hold as GBP fund? I guess my real question is, why do they have 2 sub-classes?

Apologies, if it came across as a silly question.

The answer to the second question is simply so that investors, esp. small time private ones, can buy in GBP without having to suffer brokers' currency exchange fees.

The answer to the first is yes, but not for the reason you think and there's not any actual conversion of the GBP.

You have to remember that you buy and sell ETFs on the secondary market so, unlike OEICs/UTs where you buy and sell from the provider themselves, no new shares/units are created/destroyed when you buy/sell. When you buy, say, IBTS your money doesn't go to Blackrock to buy more US treasuries, it simply goes to the guy that you bought the shares from (actually, the market maker, but let's not complicate things!)

There is no separate GBP fund, it is simply the USD based fund denominated in GBP, and the implicit conversion is that expressed by the market, at interbank rates and without any brokers' fees.

[neorullz]

So, to summarise, say if I were to buy £10k worth of IBTS today, it will still track the US treasury market prices and the day I sell it in the future, I will get the GBP-equivalent of the proceeds based on the dollar US treasury prices on that day?

[mc2fool]

So, to summarise, say if I were to buy £10k worth of IBTS today, it will still track the US treasury market prices and the day I sell it in the future, I will get the GBP-equivalent of the proceeds based on the dollar US treasury prices on that day?

Ceteris paribus, yes (ETFs don't always trade at NAV, but they usually revert to it pretty quickly), and you will get it without brokers' exchange fees.

[neorullz]

Teaching kids is never easy You are a really helpful person. Thank you and have a wonderful day.

[TUK020]

also reading with interest.
Is there an inflation protection version of the same thing?

[Lootman]

also reading with interest.
Is there an inflation protection version of the same thing?

US TIPS:

https://www.investopedia.com/terms/t/ti ... es%20(TIPS)%20are%20a%20type%20of,purchasing%20power%20of%20their%20money.

[mc2fool]

also reading with interest.
Is there an inflation protection version of the same thing?

iShares $ TIPS ETF, ITPS (GBP, Acc), https://www.ishares.com/uk/individual/en/products/251714/