Hi, Eric from timesretire .co .uk. I was looking
at my HSBC S &P 500 ETF and I can see that it's
achieved barely a respectable 4 .8 % over the
last year. Now that seems on the low side. So
let's open it on eToro and have a look there.
So the S &P 500 there returned 14 % over the
last 12 months. Now, this is an underlying index
priced in US dollars, and it's one that often
catches investors off. Now, while both views
are looking to show the S &P 500, I'm looking
at two very different ways of measuring and buying
it. Now, the massive gap in performance, 4 .8
% versus 14%, is down to one main factor, the
currency effect. Now, this is the main reason
for the difference in percentage gains. Now,
the HSBC one is a UK -listed ETF priced in GBP,
whereas the eToro view is looking at the underlying
US index priced in US dollars. Now, since the
S &P 500 is made up of US companies, its value
is naturally in dollars. If you borrow the HSBC
version in pounds, it returns the 10 by 2 things.
How the stock performed and how the exchange
rate moved. Now the pound gets stronger compared
to the dollar, like it did last year. Your gains
in pounds will look smaller because the dollars
you own through the fund are now worth fewer
pounds. Now in my case, the US market went up.
14 % but the ball and value of the dollar against
the pound 8 9 % of those gains for a UK investor
now I'm looking at a specific fund managed by
HSBC for my ETF it buys the S &P 500 stocks for
me and it has a specific share price which at
the moment is 51 .08 and that's because the fund
Divides its dividend total value to shares that
I can buy. Whereas the eToro one, this is the
mathematical score of the 500 largest US companies.
You can't buy the index directly at £6 ,917.
You can only buy products like ETFs or CFDs that
track it. We also need to talk about expenses.
So the HSBC fund has a small amount of fee. to
about 0 .09 % per year. Now, while small, this
means an ETF will almost always slightly underperform
the perfect index, which is shown on eToro. Now,
furthermore, eToros often showed price return,
just the stock price, while some ETFs include
the tilt return, which is the stock price plus
the dividends reinvested. Now, you may... have
invested in US -based index like the S &P 100
from the UK. And this means you're essentially
making two bets at once. One on the stock market
and one on the US dollar. Now, a currency hedge
fund is designed to cancel this out. So how does
the currency hedging work? Well, in a standard
ETF that's unhedged in the S &P 500. If the S
&P 500 goes up 10%, but the US dollar drops 10
% against the pound, your total returns zero.
Our hedge fund uses financial contracts called
forwards to lock in the exchange rate. And this
ensures that if the S &P 500 goes up 10%, your
investment in pounds also goes up roughly 10%.
That's regardless of what happens to the exchange
rate. So how do we find these funds? Well, you
don't need to look for a special broker. You
just need to look for specific keywords in the
fund's name. Look for the word hedged. The fund
name will explicitly say something like S &P
500 GBP hedged. Now, check the ticker. Most providers
have two versions of the same fund. For example,
the iShares S &P 500 unhedged, which ticker,
or iShares S &P 500 GBP hedged, which is ticker
IGUS. Now the AC versus DIST, this is a trap
that confuses a lot of people. Those are about
what happens to your profits, not the currency.
But is it worth it? What's the trade -off? Well,
hedging isn't free money. There are two things
to consider. Firstly, higher fees. Because the
fund manager has to buy those currency contracts,
the management fee is slightly higher. For example,
a standard ETF might cost, as I said, 0 .09%,
while the hedge version might be 0 .12%. Hedging
is great if the pound gets stronger. However,
if the pound weakens, an unhedged fund actually
performs better because your dollars are suddenly
worth more than pounds. You know what many pros
do? The long -time investors, if they're in the
market for more than 10 years, they choose the
unhedged versions because currency moves tend
to even themselves out over decades and they'd
rather pay that kind of small management fee.
Hope that was useful. See you on the next one.
Thanks for being a member.