Exposure to USD - Help With Currency Risk

Hi - just trying to get some advice around the potential effects of currency risk with over exposure to USD. I have read some great insights about this on some threads in this forum but am still not quite fully understanding so hopefully you will be able to shed some light even further.

With the GBP generally low and working under the assumption we have no idea which way it will go in the future I was hoping to get your thoughts on how to reduce this currency risk as I have a high percentage of USD holdings.

Just to quickly outline my current portfolio standings;

65% of my holdings are USD (mainly in ETFs where USD dominates – e.g. S&P 500), whilst only 7% are GBP (the rest all different currencies but I am mainly asking around USD-GBP).

My thoughts around how I might lessen the effects of currency risk are as follows;

I currently have a large holding in VWRL (20%). If I switched this to a GBP hedge version of a similar etf - IWDG, I think this would change my exposure to 53% USD to 26% GBP? Does that sound about right - if so is still too much USD?

I invest monthly, as I am buying regularly - will this negate some of the currency risk as I will in effect be buying at all different times of currency fluctuation (when the dollar is stronger and weaker over time?)

Finally, the area I probably understand least (apologies if I am missing the obvious here), I have read on here around buying ERNU to negate some currency risk as it effectively tracks USD/GBP - how does this work? How does it create a type of USD pot? How does it help with USD exposure? With my current portfolio if the GBP strengths then my holdings will reduce in value - what will happen to the value of ERNU if the GBP strengthens (and why?).

Is this the same concept of USD bonds - for example I have seen VUCP suggested, will this help with exposure to USD (and if so how?) or will it make my exposure to USD worse?

To summarise, say it was accepted that I wanted to achieve some protection to exposure to USD, what would be an approx % of IWDG, or ERNU or VUCP to even out to an ideal level?

Appreciate a lot of questions there but can’t quite get my head around it at the moment!

Thanks in advance!

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Welcome to the Forum!

So first of all buying ERNU is probably not a wise idea. Yes it is only short-term debt with a fee of 0.09% but there are issues with holding bond ETFs. As we saw during the early phase of the crisis it is possible for bond markets to stop functioning and this saw people trying to sell take huge losses on positions due to liquidity issues (nothing to do with the actual quality of the underlying investment).

The concept is that as the bonds are USD denominated you buy them at an FX rate you like and then buy USD shares when you actually want to buy a particular share on the share price alone (not FX as well). However, it also means your holdings are in USD and so you still have FX risk just in bonds not stocks. You can already achieve this without any risk by using a US broker (you can open one online by filling out a W-8BEN form) and using a service like Transferwise to send money at specific rates.

You can see from the above screenshot how bad the dislocation was. There is no alternative to cash except cash. I have seen this suggestion around the Freetrade forum and personally think it is a terrible idea. As it can mean that when you come to pounce on low stock values you are unable to sell without realising a huge loss.

Secondly, IWDG is not the same as VWRL. The VWRL is all of the world stock market whereas IWDG (the only similar hedged alternative available on Freetrade) only covers the developed world and so had a different risk profile. The iShares EM ETF is also unhedged and accumulating (or at least the version on Freetrade is) and so is not really a good swap.

That being said IWDG is an effective option to hedge your risk to major market currencies (i.e. the USD) and then you can buy the Vanguard EM ETF. As EM currencies are far less established and important (or are not free floating) there is less information about their trajectory but one would assume that over the next 20-30 years, as economies like Nigeria, Indonesia and India supplant Western economies, that EM currencies will become more useful and traded and therefore valuable.

Thirdly, yes investing monthly will average out your currency exposure through dollar cost averaging (DCA) but it does not negate your overall exposure. There is no set percentage for USD it is whatever you feel comfortable with but given that the US stock market is about 50-60% of total global value then it does not seem to far off to have what you currently have, or what you would have after switching to IWDG. However, owning ERNU does not even out your currency risk as you are still holding USD denominated bonds and the same goes for VCUP.


Thank you for a very thorough response, certainly helped explain the concepts I was trying to grasp.

Good point around the difference between VWRL and IWDG I hadn’t taken that into account. Just to check you mentioned two Emerging Market ETFs that could supplement switching to IWDG from VWRL. You mentioned the iShares EM ETF wouldn’t be a good swap but the Vanguard EM ETF could be used. They are both unhedged is there a reason why one would be more suitable than the other or were those examples used in reference to different points?

Ultimately as a step to reduce currency risk to USD a bit whilst holding largely similar assets I could assume very roughly that VWRL = IWDG + an EM ETF ?

Thanks again

The difference between the two ETFs is the cost and the that the iShares one is accumulating, I always prefer distributing but that is down to personal circumstance.

Yes your replacement works.

Ultimately there is no way to avoid currency risk except though hedging. All other approaches just bring in other additional risks.

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This could be seen as a benefit rather than a risk…

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Yes I agree it could work the other way, and over the past 30 years or so it has done and would have benefited. Therefore I suppose it depends on your outlook / what other factors you want your investments to be potentially be affected by (positively or negatively) - risk perhaps the wrong word, potential to be impacted is perhaps better. My thinking being I am not looking for a perfect balance, but a strategy to reduce having so much exposure to the USD (accepting this will reduce potential risk and in turn potential benefit to currency and leave it more down to the performance of my portfolio?)