A currency hedged ETF helps investors to mitigate the potential negative effects of a declining
currency when you are investing in foreign equities or foreign fixed income for example.
So, if you look back historically over the last 18 months, a British investor who would
have invested in the European equity market in the Eurozone would've seen a lot of upside
in the equity values go up but he would have had a lot of that negated by the decline in
the Euro value against Sterling through that period.
The other benefits of currency hedged equity ETFs is the fact that you can also gain access
to a rising currency against your existing currency as a British investor. So, even if
you're not looking technically to hedge out the currency risk, we've had British investors
who've bought our European monetary union equity ETF with a US dollar hedge embedded
into it. So that way they got the upside in the European equity market but also got to
ride the upside in the US dollar appreciating against Sterling and of course the Euro as well.
Whereas they may not have had the ability within the investment guidelines to buy a
currency explicitly, they really would just need to have bought something that was embedded
into the fund for example.
The great thing about having a product with currency hedging embedded into it is that
you can decouple or separate the implicit currency bet from the equity bet you have
to make when you invest in foreign equities or foreign fixed income, from the actual equity
bet or fixed income bet. There's many cases where you would've say, like the equity story
in Japan, the currency depreciation whilst you were invested in that could've really come
back to negate or certainly diminish your returns quite dramatically.
The key message about this is that currency hedging is not something you should be doing
all the time by any means. It's simply another tool in the toolbox. There's periods where
trying to have currency hedging embedded into the product is very much a bad idea. A British
investor would've been very ill advised to have bought a US equity market exposure with
a GBP currency hedge embedded into it over the last 18 months because the US dollar has
appreciated against Sterling over that period. So you would've forgone the US dollar appreciation
against Sterling or the upside that you would've gotten from being exposed to that. So clearly
it's a double edged sword but it's a great tool in the toolbox to pull out when you feel
that that foreign currency might be declining whilst you're invested into it.
It is slightly more expensive but on average for instance our range of ETFs with currency
hedging embedded into it have just 10 bps of additional cost. So just one tenth of a
percent additional cost for the currency hedging as opposed to the plain vanilla version of
that exposure. In fixed income that additional cost is just 0.05%, so just one twentieth
of a percent to get that exposure. So relatively speaking if you have a high conviction about
a declining currency, I think it's a very small price to be paying in relation.
You might say have core equities in the UK where you're stock picking or buying active
funds in the UK market but for instance you might be buying Japan and you want to buy
an ETF but you're concerned about the currency risk of abenomics still coming through that
they might do some quantitative easing which might have a negative impact on the currency
of the Yen against Sterling over that period. So that would be a prime example of where
you'd make an active decision to buy a Japanese ETF with GBP currency hedging embedded into it.
Buying a currency hedged ETF is simply exactly the same as buying a regular ETF. They trade
on exchange just like a single share such as HSBC or buying a Vodafone share and the
other additional benefit with an ETF is that you can see it moving throughout the day on
an exchange. If you wanted to buy it at 10 in the morning and sell it at 3pm, you can
do that just like you can with a single stock.