For those uncertain about FX impact on their investments

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pennywiser
Posts: 177
Joined: Sat Jul 16, 2022 1:54 pm
Location: UK

For those uncertain about FX impact on their investments

Post by pennywiser »

Recently there has been an increase in threads related to impact of FX, especially from European investors.

Many (me included) are uncertain which currency denominated assets they should be purchasing. Main issue is current USD strength, Euros and sterling are weak. World equities are down due, markets volatile and flight to USD seems unstoppable right now.

I personally want to buy equities - country weight right now. What I am worried about is that on the way up, when the current crisis is over, flight to safety of USD will reverse and dollar will weaked again other currencies. Then the rise in equities will be partly offset by fall in USD, decreasing my returns.

What I am looking into are currency (GBP) hedged ETFs.
https://www.justetf.com/uk/find-etf.htm ... tOrder=asc

For example, this seems be a good choice: iShares MCIS World - 0.30% p.a. Total expense ratio
iShares Core MSCI World UCITS ETF GBP Hedged (Dist)

EUR hedged version is little bit more expensive at 0.55% p.a. TER.

These might be worth a look if you are worried about FX. But remember, if USD keeps strengthening you will Not be able to benefit from that in hedged fund. Let me know your thoughts.
Last edited by pennywiser on Mon Oct 03, 2022 2:33 am, edited 1 time in total.
artymorty
Posts: 31
Joined: Mon Sep 05, 2022 12:44 pm

Re: For those uncertain about FX impact on their investments

Post by artymorty »

This article recently helped me get a better handle on currency risk:

https://www.justetf.com/en/news/etf/the ... y%20change.

Currency fluctuations should apparently have no discernible negative impact on long-term investors’ equity returns. They might even help reduce volatility, if Purchasing Power Parity is to be believed. Things are a bit different with bonds.

This is why I’m currently buying non-hedged stock funds denominated in the currency I’m planning on spending in retirement. There are no guarantees, but it seems like a safer course of action than trying to outsmart foreign exchange movements.
Valuethinker
Posts: 48954
Joined: Fri May 11, 2007 11:07 am

Re: For those uncertain about FX impact on their investments

Post by Valuethinker »

artymorty wrote: Sun Oct 02, 2022 5:41 am This article recently helped me get a better handle on currency risk:

https://www.justetf.com/en/news/etf/the ... y%20change.

Currency fluctuations should apparently have no discernible negative impact on long-term investors’ equity returns. They might even help reduce volatility, if Purchasing Power Parity is to be believed. Things are a bit different with bonds.

This is why I’m currently buying non-hedged stock funds denominated in the currency I’m planning on spending in retirement. There are no guarantees, but it seems like a safer course of action than trying to outsmart foreign exchange movements.
To be clear it is the *hedged* fund which is NOT trying to outsmart foreign exchange movements.

The main reasons to do unhedged are:

- in the long run, currencies should follow PPP. But in fact they don't - over any time horizon that most of us invest on

- hedging has a cost (although it should be small) and certainly makes the source of returns less transparent

- many of your other assets are in your home currency - equity in your home, your future career earnings, your state pension, any other occupational pensions

Thus to the extent I have held bonds, plus home equity + DB pensions, the recent performance of the UK GBP has been torrid, and that has hurt - really hurt.

Only my international equities ("Never Enough" https://www.youtube.com/watch?v=rQWZK5U233s ;-)) have braked the fall.
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