I’m moving into index funds and I’m looking to build out an automated S&P500 position for the long haul, but I was wondering what would be the best way to maximise my returns by reducing losses from currency decline.
If I have a pie split evenly between VUAG and VUAA (i.e., one denominated in USD and one in GBP) does that stop my long-term gains being devalued in real terms by currency swings?
If you graph both together it should tell you historically how performance returns compare. The only thing with here is you would pay a 0.15% FX on the buy/sell leg, so that would impact the return slightly.
I suspect both are unhedged, so unless one has a higher spread than the other, the returns should be the same bar the fx fee.
Long term you want the one with the lowest fees / tracking error.
Overlaying the charts doesn’t account for FX impact though, as one is in USD and one is in GBP.
In theory, I’d be taking both sides of the FX trade equally and thus negating any losses from it to give a pure return, no?
If you’re a long-term investor, the perceived wisdom is not to bother with currency hedging, but I can see why some are looking at it. This article covers the argument against well:
I actually think that comparison in there is pretty poor. There’s an article that compares a hedged / unhedged strategy over a period of 1 to 20 years, across different currencies but mostly USD.
There is a cost in hedging - interest rate differentials, broker fees, spread. No one can predict the future, but to me what matters is global buying power.
It doesn’t matter if you invest £1 today for it to be worth £2 tomorrow, when today your £1 can buy say $1.4, but tomorrow your £2 can only buy $1.3. Just a made up example.
Investing globally is all about balance. Some will go up, some go down, but long term you don’t have the additional fees and costs associated with the hedge. The longer you invest, the bigger the edge this should be in theory. The example on your article is because all markets went a bit haywire in March 2020, so a lot of hedge positions had to be constantly adjusted, at higher fees against an ever changing portfolio.