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In this video, I go through when the right time is to use currency hedged ETFs as part of your portfolio.
Disclaimer: This video is for informational and educational purposes only and should not be construed as financial advice.
Further Reading:
https://irishfinancial.ie/when-to-invest-in-a-currency-hedged-sp-500-etf/
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0:00
In this video I'm going to be going through how you can potentially save the returns on your
0:05
investments in US based indexes such as the S&P 500 from being crushed by currency fluctuations
0:11
and FX losses and that is by using simple financial products such as currency hedged ETFs
0:17
If you like me are based in Europe or the UK or any other place that is not the US then you are
0:23
going to have to manage the currency fluctuations between the US dollar and your own local currency
0:28
Because let's be honest, most of the indexes that we actually invest in from time to time are all US-based, such as your S&P 500, your Nasdaq, your Dow Jones and your Russell 2000
0:39
Back in October 2021, one US dollar would get you 0.86 cent of a euro
0:44
And now a year later, that same dollar will get you 1 euro and 2 cent, as the dollar has appreciated 20% over the last year
0:51
And it is not just the euro that the dollar has been appreciating against, but also the pound sterling
0:57
it is up around 21 or 22% against the pound in the last 12 months
1:01
This is a pretty huge movement in the exchange rate in a short space of time
1:05
and it actually has benefited a lot of investors over the last 12 months
1:09
So for example if we take the S 500 over the same time period the last 12 months it is down 16 But even though the S 500 is down 16 investors whose local currencies are GBP and euro would have benefited from holding their money in
1:26
US dollar over that time period. If we have a look at Vanguard's VUSA fund which actually tracks the
1:31
S&P 500 it is up 4.41% over the last year. This fund is not currency hedged at all but its trading
1:39
currency is gbp so that means it also prices in the fx movements as well as the underlying movement
1:46
of the s&p 500 so overall european and uk investors have been much better off because they have their
1:52
money in the us dollar even though the s&p 500 is going down they managed to still get a profit
1:58
of about 4.5 over the last year the main question that we need to get to is when is the actual right
2:04
time to use a currency hedged ETF. When you currency hedge any ETF, and let's take one that
2:09
tracks the S&P 500 in this example, you are protecting yourself against the dollar depreciating
2:14
in value against your local currency. Essentially, you are just completely covering yourself off to
2:18
any negative movements in the exchange rate. But it is important to note that when you actually
2:23
hedge and protect your downside, you do forego any potential upside. So any favourable movements
2:28
in the exchange rates you won see any profits from that If I held a euro currency hedged ETF of the S 500 over the last 12 months I would actually be down about 16 rather than up around 4 That is because the currency hedge is protecting myself against the dollar depreciating but over the last 12 months it has appreciated significantly
2:48
Therefore it is a simple enough formula that you can use to decide whether it is the right time or not to invest in a currency hedged ETF
2:55
If you expect the dollar to continue to appreciate against your home local currency, then you are better off to remain with a completely unhedged ETF
3:03
But on the other hand, if you expect the dollar to depreciate over the next while, then you are far better off going with a currency hedged ETF
3:11
The difficulty in this as always is it is very hard to predict the future and it is also very hard to time the market
3:17
in my own personal opinion over the next short to medium term we could possibly see the dollar
3:22
depreciate a bit against the euro and the sterling and that's not financial advice whatsoever but
3:28
that's why i'm probably going to go with a currency hedged etf myself over the next short term but
3:33
anything can happen as we know there's a lot going on at the moment as we know such as war
3:37
economic instability and energy crisis and everything so so the short term is pretty
3:42
unpredictable at the moment but maybe over the medium term at least you would expect the euro
3:46
and the pound to gain some of their strength back against the dollar at some point but that anybody guess Lastly I just wanna go over how you can actually invest in a currency hedged ETF One really good resource that I often use that I show you in a second is
3:59
justetf.com. They have a really good ETF screener which you can use to filter for any type of ETF
4:06
that you're looking for. If you are looking for a euro hedged ETF that tracks the S&P 500 then a
4:12
good one to go with is the ticker symbol IUSE which is a fund run by BlackRock or iShares
4:18
The expense ratio on this one is a little bit higher than you would expect on a kind of a passive fund because they have to build in a bit of FX management on it
4:27
So it's at 0.2% and you will be able to trade that on brokerages such as DeGiro and Trading212
4:34
I'll leave affiliate links below in the description section if you want to sign up for any of those
4:38
So I usually go to JustETF.com to search for any index that I'm interested in
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I just pop the name of the index into the search bar and then on the left hand side here I can filter for
4:48
currency hedged ETFs for example in this instance. As you can see here from the list
4:53
there's only kind of one option that's coming up here for euro hedged ETFs but there's a ton of options if your local currency is GBP. So anyway that's pretty
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much it for my video today. I hope you found it useful and enjoyable. If you did please make sure
5:06
and subscribe to my channel and drop a like on the video if you're feeling generous. I'll see you guys
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again in the next one
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