When to invest in a Currency Hedged S&P 500 ETF

  • By: Walter Dunphy ACCA
  • Date: October 3, 2022
  • Time to read: 4 min.

Currency risk is not something we often factor into our investing decisions but many people are starting to realise it can have a huge impact on your returns.

At the time of writing the USD has been surging against the Euro and the British Pound which has been to the benefit of many investors who have held their money in funds such as Vanguards VUSD.

Source: Google Finance

The VUSD fund is down almost 18% over the past 12 months, but when you factor in that the dollar has appreciated 18% against the Euro over the same time it leaves European investors in a breakeven position.

In this blog post, I will take a look at currency hedged ETFs and when might be the most appropriate time to use them as part of your investment portfolio.

Key Takeaway

– In times when the Euro is appreciating against the US Dollar, investors will be facing fx losses if they do not appropriately hedge their investments.

– A suitable ETF available to retail investors in Europe that will allow them to hedge their currency risk is the iShares S&P 500 EUR Hedged UCITS ETF Acc (IUSE), which on a monthly basis hedges USD exposure back to Euro.

– Whenever you hedge against currency risk you limit your downside but also rule out profiting from favourable currency swings.

When is the best time to invest in a currency hedged S&P 500 ETF?

The very basic premise of hedging is that you are covering your downside. But the counter argument some people may have to hedging is that when you cover your downside you also forego any potential upside.

If you were trying to maximise your gains then you would want to invest in a currency-hedged S&P 500 ETF when the dollar depreciates and invest in a regular unhedged ETF such as the Vanguard funds VUSA/VUSD when the dollar is appreciating.

The difficulty of course is trying to time this, in times of little volatility in the currency markets, hedging may not be something you have to worry about. Even over the very long term, the effects of currency risk tend to even out.

In the current economic climate when we have already seen the US Dollar appreciate to all-time highs against the Euro and British Pound, we may expect this to retrace back to a more normal relationship in the short to medium term (especially when the ECB and the Bank of England further increase interest rates).

If this trend was to play out, then those invested in a currency-hedged S&P 500 ETF would outperform those with the unhedged version of the S&P ETF.

Next up we will have a look at some examples of currency hedged ETFs that are available to retail investors.

Euro Hedged S&P 500 ETFs

There are limited options when it comes to Euro currency-hedged ETFs in Europe – the iShares S&P 500 EUR Hedged UCITS ETF Acc (IUSE) is one of the only ETFs on the market.

Your first port of call for gathering information on iShares S&P 500 EUR Hedged UCITS ETF Acc is the Key Investor Information Document & Fact Sheet.

If you already are a Degiro customer then you will find this ETF on their trading platform. For anyone interested in signing up for a Degiro account you can avail of a €100 commission credit when you sign up with the following link – SIGN UP HERE.

One item you may be curious about is how the fund managers actually go about hedging the ETF.

The Index also uses one month foreign exchange (FX) forward contracts to hedge each non-Euro currency in the Index back to Euro in accordance with the S&P Hedged Indices methodology

iShares (Blackrock)

The expense ratio, which is the fees charged annually on your investment, tends to be slightly higher for currency-hedged ETFs. The iShares S&P 500 EUR Hedged UCITS ETF Acc (IUSE) for example has an expense ratio of 0.20% compared to some of the unhedged Vanguard funds which have lower expense ratios of 0.07%. This is all down to the additional resources needs and management to enable the fund to be hedged monthly.

GBP Hedged S&P 500 ETFs

There are far more options for Currency Hedged ETFs if the local currency you want to hedge is British Pounds (GBP). A really good resource for checking keeping track of these funds and screening all the ETFs on the market for any criteria you require is JustEtf.com.

Below is a screenshot from JustETF.com that shows all of the GBP hedged ETFs that track some form of the S&P 500 Index.

Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.

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