In this video I'm going to be going through how you can potentially save the returns on
your investment in US based indexes such as the S&P 500 from being crushed by currency
fluctuations and FX losses and that is by using simple financial products such as currency
hedged ETFs. If you, like me, are based in Europe or the UK or any other place that is not the US
then you are going to have to manage the currency fluctuations between the US dollar and your
own local currency. Because let's be honest, most of the indexes that we actually invest in from time to time
are all US based such as your S&P 500, your Nasdaq, your Dow Jones and your Russell 2000
Back in October 2021, one US dollar would get you 0.86 cent of a euro and now a year
later that same dollar will get you 1 euro and 2 cents as the dollar has appreciated
20% over the last year. And it is not just the euro that the dollar has been appreciating against but also the
pound sterling. It is up around 21 or 22% against the pound in the last 12 months
This is a pretty huge movement in the exchange rate in a short space of time and it actually
has benefited a lot of investors over the last 12 months. So for example, if we take the S&P 500 over the same time period the last 12 months, it
is down 16.6%. But even though the S&P 500 is down 16.6%, investors whose local currencies are GBP and
Euro would have benefited from holding their money in US dollar over that time period
If we have a look at Vanguard, the USA fund which actually tracks the S&P 500, it is up
4.41% over the last year. This fund is not currency hedged at all but its trading currency is GBP so that means
it also prices in the FX movement as well as the underlying movement of the S&P 500
So overall, European and UK investors have been much better off because they have their
money in the US dollar even though the S&P 500 is going down, they managed to still get
a profit of about 4.5% over the last year. The main question that we need to get to is when is the actual right time to use a currency
hedged ETF. When you currency hedge any ETF and let's take one that tracks the S&P 500 in this example
you are protecting yourself against the dollar depreciating in value against your local currency
Essentially, you are just completely covering yourself off to any negative movement in the
exchange rate. But it is important to note that when you actually hedge and protect your downside
you do forego any potential upside. So any favourable movement in the exchange rate, you won't see any profit from that
If I held a Euro currency hedged ETF of the S&P 500 over the last 12 months, I would actually
be down about 16% rather than up around 4%. That is because the currency hedge is protecting myself against the dollar depreciating but
over the last 12 months, it has appreciated significantly. Therefore, it is a simple enough formula that you can use to decide whether it is the
right time or not to invest in a currency hedged ETF. If you expect the dollar to continue to appreciate against your home local currency, then you
are better off to remain with a completely unhedged ETF. But on the other hand, if you expect the dollar to depreciate over the next while, then you
are far better off going with a currency hedged ETF. The difficulty in this as always is it is very hard to predict the future and it is
also very hard to time the market. In my own personal opinion, over the next short to medium term, we could possibly see
the dollar depreciate a bit against the Euro and the Sterling. And that's not financial advice whatsoever
But that's why I'm probably going to go with a currency hedged ETF myself over the next
short term. But anything can happen as you know. There's a lot going on at the moment as you know such as war, economic instability and
energy crisis and everything. So the short term is pretty unpredictable at the moment but maybe over the medium term
at least, you would expect the Euro and the pound to gain some of the strength back against
the dollar at some point. But that's anybody's guess. Lastly, I just want to go over how you can actually invest in a currency hedged ETF
One really good resource that I often use that I'll show you in a second is just ETF.com
They have a really good ETF screener which you can use to filter for any type of ETF
that you're looking for. If you are looking for a Euro hedged ETF that tracks the S&P 500, then a good one to go
with is the ticker symbol RGSE which is a fund run by BlackRock or iShares
The expense ratio on this one is a little bit higher than you would expect on a kind of a passive fund because they have to build in a bit of FX management on it
So it's at 0.2% and you will be able to pay that on brokerages such as Desiro and Trading212
I'll leave affiliate links below in the description section if you want to sign up for any of those
So I usually go to just ETF.com to search for any index that I'm interested in
I just pop the name of the index into the search bar and then on the left hand side
here I can filter for currency hedged ETF for example in this instance
As you can see here from the list, there's only kind of one option that's coming up here
for Euro hedged ETF but there's a ton of options if your local currency is GBP
So anyway, that's pretty much it for my video today. I hope you found it useful and enjoyable
If you did, please make sure and subscribe to my channel and drop a like on the video
if you're feeling generous. I'll see you guys again in the next one