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 hadnāt 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 wouldnāt 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 ?
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.
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?)
With the news that sterling is plunging, I was wondering how currency fluctuations will affect the price of stocks / ETFs.
Would I be right in thinking:
For shares denominated in USD, a decrease in the value of the pound would effectively decrease of the stock for UK investors. For example, if i buy 100 shares at $1.30 today, I spend Ā£130. If the share price if unchanged in USD, then those 100 shares are only worth Ā£100 if GBP/USD reach parity. (But conversely, I suppose you could potentially make extra if you successfully ābetā on a low point for Ā£/$ exchange AND the stock is on an upward trajectory?)
For GBP denominated ETFs that track US markets (S&P 500 for example) currency fluctuations are built into the price. So, even if the USD market price were static, the GBP price would decrease as the value of the pound decreases?
(Itās been a long day, so if Iāve got this totally wrong just about. Iāve confused myself at least 12 times).
Iāve been thinking about this too today. Have my eye on a few US stocks but wondering if Iād be better focusing on UK stock at the moment and The S&P 500 via an ETF.
A decrease in the value of the pound would effectively decrease a US stock for UK investors? Itās the other way around. If you start with Ā£100 and buy US stock at an exchange rate of Ā£1=$1.30, then you will have $130 worth of stock. Say the pound now devalues to a rate of Ā£1=$1.20, but you of course have $130 worth of stock, which will be worth Ā£108 and you have Ā£8 in profit. If it falls to parity your $130 will be worth Ā£130.
For GBP denominated ETFs that track US markets (S&P 500 for example) currency fluctuations are built into the price. This is true for unhedged ETFs and have non-GBP as their base currency (you can find the base currency in the information document). Hedged ETFs are actively managed to minimise currency fluctuations but that will never be perfect. As of right now, I believe all Freetrade ETFs are unhedged.
The decrease in the value of the pound, compared to USD, meant that if anyone held US stocks in their portfolio, gained in value.
It also meant that anyone who bought US stocks yesterday paid more than they would have if they had bought it the day before.
So your currency decision would be, do you think the pound will continue to weaken against the dollar? If you do, then US stocks become more attractive. If you think the pound will recover, then you might want to stop buying US stocks as the recovery can potentially wipe out any gains from that stock.
So in leymans terms, the more the pound drops the more āexpensiveā US stocks become to buyā¦the higher the pound is āthe more ācost effectiveā US stocks will be?
Iām up with all the terminology and reading balance sheets, but economics and currency I donāt have a clue lol
*what Iām really trying to ask, is now a good time for a UK investor to be buying single American stocks? X
Precisely. Iām holding out till when hopefully one day we get towards of $1.50/Ā£. More chance that rate will go up than further fall so more risk of losing
Iām pretty heavily exposed to the dollar. Everything is disproportionately up. Should I sell and re buy at a later date? Iām struggling what to decide here
This is not investment advice but you should think about the potential cuts the Federal Reserve will make (driving the dollar down) versus the Brexit conundrum (driving the pound down). Whichever is stronger will control the currency direction.
In general, you are safer ātaking profitā and having the funds to reinvest then sitting on the money. You can always reevaluate and enter the market in a less volatile position.
This topic feels as relevant as ever, I feel like Iām in a real conundrum currently.
I see many buy opportunities ahead in the near future but these are all US stocks. The pound tanking against USD has really helped me with my current US holdings but on the flip side I am really reluctant purchasing new US stocks because of the weak pound.
Many of the good folks of Freetrade have been investing in one or other S&P 500 index using an ETF. As we all know this index has declined in the last year by over 20% (at one point). But perhaps some of us havenāt felt this decline (or at least not as badly as that). Why not?
The reason is that GB pound (GBP) (Ā£) has also been declining against the US dollar (USD)($). Google screenshot over year of how many USD dollars one GBP has bought you:
So how does this translate into your not so bad looking, non currency hedged, SP500 ETF? Do you want to see by how much? I took the daily closing currency data from yahoo!Finance, did some calculations to transform the S&P 500 data and knocked together this graph which shows the % daily change in the SP500 over the past year (i.e. from 25 Oct 2021) in both dollars and pounds:
I hope you can now see how much the weak pound has benefited your S&P 500 GBP ETF. If you look at a gain price chart of your (unhedged) SP500 GBP ETF over one year you will see it looks remarkably like my red line. But if you look at the gain in the SP500 index in dollars (and therefore S&P 500 dollar denominated ETF) you will see a graph that looks remarkably like my green line.
Amazing post! Thanks @bitflip this is really useful, currently fluctuation isnāt anything retail Investors have had to worry to much about until recently. This post is in really insightful.
Just as a very simple addition to your excellent comment @bitflip, hereās an article I found while researching what could happen if the pound goes back up in value, especially against the dollar.
