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.