WEBVTT 00:00:00.000 --> 00:00:04.480 Hi, Eric from timesretire .co .uk. I was looking 00:00:04.480 --> 00:00:09.859 at my HSBC S &P 500 ETF and I can see that it's 00:00:09.859 --> 00:00:13.259 achieved barely a respectable 4 .8 % over the 00:00:13.259 --> 00:00:18.079 last year. Now that seems on the low side. So 00:00:18.079 --> 00:00:21.359 let's open it on eToro and have a look there. 00:00:21.480 --> 00:00:26.239 So the S &P 500 there returned 14 % over the 00:00:26.239 --> 00:00:29.800 last 12 months. Now, this is an underlying index 00:00:29.800 --> 00:00:32.960 priced in US dollars, and it's one that often 00:00:32.960 --> 00:00:35.700 catches investors off. Now, while both views 00:00:35.700 --> 00:00:39.619 are looking to show the S &P 500, I'm looking 00:00:39.619 --> 00:00:42.659 at two very different ways of measuring and buying 00:00:42.659 --> 00:00:46.140 it. Now, the massive gap in performance, 4 .8 00:00:46.140 --> 00:00:52.619 % versus 14%, is down to one main factor, the 00:00:52.619 --> 00:00:56.859 currency effect. Now, this is the main reason 00:00:56.859 --> 00:00:59.899 for the difference in percentage gains. Now, 00:00:59.939 --> 00:01:06.340 the HSBC one is a UK -listed ETF priced in GBP, 00:01:06.439 --> 00:01:12.519 whereas the eToro view is looking at the underlying 00:01:12.519 --> 00:01:17.280 US index priced in US dollars. Now, since the 00:01:17.280 --> 00:01:21.819 S &P 500 is made up of US companies, its value 00:01:21.819 --> 00:01:25.680 is naturally in dollars. If you borrow the HSBC 00:01:25.680 --> 00:01:29.859 version in pounds, it returns the 10 by 2 things. 00:01:29.980 --> 00:01:33.599 How the stock performed and how the exchange 00:01:33.599 --> 00:01:37.939 rate moved. Now the pound gets stronger compared 00:01:37.939 --> 00:01:41.859 to the dollar, like it did last year. Your gains 00:01:41.859 --> 00:01:45.680 in pounds will look smaller because the dollars 00:01:45.680 --> 00:01:49.260 you own through the fund are now worth fewer 00:01:49.260 --> 00:01:53.200 pounds. Now in my case, the US market went up. 00:01:53.890 --> 00:01:57.750 14 % but the ball and value of the dollar against 00:01:57.750 --> 00:02:02.349 the pound 8 9 % of those gains for a UK investor 00:02:02.349 --> 00:02:06.250 now I'm looking at a specific fund managed by 00:02:06.250 --> 00:02:12.590 HSBC for my ETF it buys the S &P 500 stocks for 00:02:12.590 --> 00:02:15.389 me and it has a specific share price which at 00:02:15.389 --> 00:02:19.289 the moment is 51 .08 and that's because the fund 00:02:19.950 --> 00:02:23.509 Divides its dividend total value to shares that 00:02:23.509 --> 00:02:28.849 I can buy. Whereas the eToro one, this is the 00:02:28.849 --> 00:02:33.210 mathematical score of the 500 largest US companies. 00:02:33.250 --> 00:02:37.550 You can't buy the index directly at £6 ,917. 00:02:38.310 --> 00:02:42.610 You can only buy products like ETFs or CFDs that 00:02:42.610 --> 00:02:45.530 track it. We also need to talk about expenses. 00:02:45.629 --> 00:02:49.840 So the HSBC fund has a small amount of fee. to 00:02:49.840 --> 00:02:54.319 about 0 .09 % per year. Now, while small, this 00:02:54.319 --> 00:02:58.280 means an ETF will almost always slightly underperform 00:02:58.280 --> 00:03:02.560 the perfect index, which is shown on eToro. Now, 00:03:02.580 --> 00:03:06.199 furthermore, eToros often showed price return, 00:03:06.439 --> 00:03:09.479 just the stock price, while some ETFs include 00:03:09.479 --> 00:03:12.780 the tilt return, which is the stock price plus 00:03:12.780 --> 00:03:16.990 the dividends reinvested. Now, you may... have 00:03:16.990 --> 00:03:20.090 invested in US -based index like the S &P 100 00:03:20.090 --> 00:03:23.389 from the UK. And this means you're essentially 00:03:23.389 --> 00:03:27.009 making two bets at once. One on the stock market 00:03:27.009 --> 00:03:30.789 and one on the US dollar. Now, a currency hedge 00:03:30.789 --> 00:03:35.110 fund is designed to cancel this out. So how does 00:03:35.110 --> 00:03:38.509 the currency hedging work? Well, in a standard 00:03:38.509 --> 00:03:43.990 ETF that's unhedged in the S &P 500. If the S 00:03:43.990 --> 00:03:47.310 &P 500 goes up 10%, but the US dollar drops 10 00:03:47.310 --> 00:03:50.169 % against the pound, your total returns zero. 00:03:50.610 --> 00:03:53.969 Our hedge fund uses financial contracts called 00:03:53.969 --> 00:03:57.370 forwards to lock in the exchange rate. And this 00:03:57.370 --> 00:04:00.710 ensures that if the S &P 500 goes up 10%, your 00:04:00.710 --> 00:04:04.389 investment in pounds also goes up roughly 10%. 00:04:04.389 --> 00:04:07.330 That's regardless of what happens to the exchange 00:04:07.330 --> 00:04:10.099 rate. So how do we find these funds? Well, you 00:04:10.099 --> 00:04:11.960 don't need to look for a special broker. You 00:04:11.960 --> 00:04:15.659 just need to look for specific keywords in the 00:04:15.659 --> 00:04:19.500 fund's name. Look for the word hedged. The fund 00:04:19.500 --> 00:04:22.939 name will explicitly say something like S &P 00:04:22.939 --> 00:04:29.279 500 GBP hedged. Now, check the ticker. Most providers 00:04:29.279 --> 00:04:32.279 have two versions of the same fund. For example, 00:04:33.199 --> 00:04:37.899 the iShares S &P 500 unhedged, which ticker, 00:04:40.929 --> 00:04:45.910 or iShares S &P 500 GBP hedged, which is ticker 00:04:45.910 --> 00:04:53.069 IGUS. Now the AC versus DIST, this is a trap 00:04:53.069 --> 00:04:56.250 that confuses a lot of people. Those are about 00:04:56.250 --> 00:04:59.329 what happens to your profits, not the currency. 00:04:59.930 --> 00:05:02.009 But is it worth it? What's the trade -off? Well, 00:05:02.029 --> 00:05:04.790 hedging isn't free money. There are two things 00:05:04.790 --> 00:05:08.089 to consider. Firstly, higher fees. Because the 00:05:08.089 --> 00:05:11.529 fund manager has to buy those currency contracts, 00:05:12.050 --> 00:05:15.529 the management fee is slightly higher. For example, 00:05:15.610 --> 00:05:20.410 a standard ETF might cost, as I said, 0 .09%, 00:05:20.410 --> 00:05:26.730 while the hedge version might be 0 .12%. Hedging 00:05:26.730 --> 00:05:28.670 is great if the pound gets stronger. However, 00:05:28.970 --> 00:05:31.910 if the pound weakens, an unhedged fund actually 00:05:31.910 --> 00:05:35.370 performs better because your dollars are suddenly 00:05:35.370 --> 00:05:38.959 worth more than pounds. You know what many pros 00:05:38.959 --> 00:05:41.920 do? The long -time investors, if they're in the 00:05:41.920 --> 00:05:43.680 market for more than 10 years, they choose the 00:05:43.680 --> 00:05:47.540 unhedged versions because currency moves tend 00:05:47.540 --> 00:05:50.220 to even themselves out over decades and they'd 00:05:50.220 --> 00:05:52.600 rather pay that kind of small management fee. 00:05:53.180 --> 00:05:55.699 Hope that was useful. See you on the next one. 00:05:55.899 --> 00:05:56.879 Thanks for being a member.