Sorry I’m being lazy and would appreciate suggestions for the best/cheapest GBP/USD product that can be held in an ISA to track GBp/USD fx rate - ideally leveraged
I primarily want to simply hedge fx rate effect on US investments - so if I buy £1000 of a US stock and I’m worried about the fx rate going against me I’d like to buy the equivalent of £1000 worth of a leveraged GBP/USD product (or at least research the cost of doing that in terms of fees/interest…)
Have you considered the underlying investments of the US share and hedging that as well? For example, Apple is a global company, so do you hedge / unhedge its revenue streams as well?
Currency Hedged ETFs could be a thought as well
I’m not looking to hedge actual investments just to have some cover for fx rate changes and wondering what is the most cost effective way to hedge the fx rate
I still don’t understand why people want to do this. Yes FX has been unfavourable recently, but if it swings the other way you’ll just lose money on your hedge rather than on the stock.
I’m not looking to do it by default on every investment/trade but rather if I have open investments/trades or am opening one but feel that the fx rate is poor I’m interested to explore the options to hedge it on a limited basis. Doing that isn’t going to change the fundamental return on the actual investments but is just removing part of the fx risk. If I lose on the fx hedge it means that I’ve gained an fx bonus on the actual investment in addition to whatever the actual investment is returning
How do you know if an FX rate is poor?
subjectively 1) in comparison to very recent values and 2) based on personal view of longer term trend. At the end of the day it is irrelevant except for the underlying management fee/leverage interest for the hedge product and the fact that capital is tied up in the hedge. If the assessment of “poor” is wrong then the investment will return an fx bonus and if the fx rate was poor then the hedge will return a profit but the investment will take a hit from the fx rate. However, not looking to hedge continuously or fully (ie covering 100% of the investment) just trying to limit the potential fx hit to investments and ideally do so by trading the hedge so that the hedge itself is profitable (compared to the effect of the fx rate on the investments)
A form of being FX contrarian ** is buy (going Long) the selling currency and sell (going Short) the bought currency. Example, you have a 1000 USD exposure (via US stocks), a way of trying to protect your portfolio, would be buying an ETC Long GBP Short USD, denominated in GBP. This way, if the USD falls vs. GBP, you loose money is USD-denominated US stocks, but you will win money due to the ETC.
An example:
Although there are leveraged versions, those are only suitable for short time periods, as they are built for daily trading. They also don’t deliver the stated leverage on medium/long terms.
Being FX contrarian or FX hedging, this risk/investment strategy is suitable for short time periods or for exotic currencies (volatiles and/or iliquid ones), due to the costs related to FX hedge. Or in an extreme situation, a loosing trend of a major currency.
** (Note that I’m not using the hedging wording, due that there isn’t a perfect FX hedge, e.g. 100% FX protection. Most US companies are multinationals, meaning that they haven’t a 100% US/USD exposure; also there is always a FX rates delay between the instruments, specially if one is traded in London time and other in NY time; and finally the exposure in FX is dynamic due to market valuation of the stocks/ETFs/etc, meaning that also the “hedge” instrument amount must also trail the same FX amount.)
They just want to scratch what’s currently itching. (short term, of course)
If you feel that the current USD:GBP Fx rate is “unfavourable” for purchasing US stocks that you intend to hold, then hedging is low risk - if the exchange rate moves in a direction you weren’t expecting, your “losses” on the hedging instrument will be counterbalanced by the effective “Fx gain” of the equity holding.
Personally, I bought a lot (for me) of US shares at what I felt was a “poor” USD:GBP exchange rate, so I decided to hedge the position with the 5x leveraged short USD long GBP wisdom tree ETF (PUS5).
If you are planning to do the same, please make sure you understand how PUS5 works, that the movement in this ETF might not be exactly what you expect over the long term (they say it’s “designed” for you to hold it very short term), and it’s quite expensive. However, as far as I can tell, it’s the best option for those wishing to hedge the USD:GBP Fx rate, especially if doing so within an ISA.
I’m not really interested in debating whether hedging Fx rate is a “good idea” or not, but if anyone has suggestions for a lower-cost (or otherwise “better”) way of doing so, I’m all ears.