Hi Chris. Thank you so much for your clear and straightforward explanation. You see, I've been thinking of exposing myself to short duration US treasuries, which currently carry a very attractive yield, i.e. the 6-month above 5% and rising, and are not nearly as exposed to bond price drops as long duration. However, at the same time, the US Dollar is at 20-year highs against my currency (the Euro), and selling euros at these prices to buy USD-denominated ETFs doesn't sound like a great plan. I mean, there is a much better potential from currency depreciation than actual profit from the T-bill interest. Would you say this is a good example of when to buy a hedged ETF? This is what I took from the video, but I would appreciate it if you (or anyone who would like to comment) would spare me a few moments to confirm the rationale. Many thanks!
Nice vid. One thing I never hear anyone talk about is that hedging is not perfect. There are significant inefficiencies with hedge due to how it's achieved. Just look at any currency hedged ETF and compare it to the index it's tracking and you will notice that the hedged ETFs underperform the underlying index on a longer term horizon.
I think its fine to have most of your portfolio unhedge, if you understand that if your local currency strengthens such that your portfolio returns are lower, that should also be offset over the long term by increased purchasing power your portfolio buys ounce converted to local currency.
Thanks for the simple explanation. However, I think you sell yourself short. Your video is not just about hedging FXS fluctuations between USD and AUD. Same principle applies to USD-CAD or indeed USD versus any currency does it not? I trade in Canada and am watching this video in order to get a basic understanding of hedging, not especially the Australian context. It sounds to me that the short answer is - it depends on... 1. What is the currency of your account 2. What is the currrency of the ETF 3. How strong is your home currency 4. How strong is the ETF currency 5. Which way you think either are going. Bloody complicated if you ask me.
Thank you for sharing this video with us. I have a question which may seem stupid: If I hold two different S&P 500 ETFs, would a 50/50 division where one-half is hedged and the other half is not hedged cancel out the risk of currency fluctuations, disregarding other factors such as varying management fees? Let’s say 50% IVV and 50% IHVV.
I don't understand why some ETFs offer a GBX and also a GBP headed version at the same time, wouldnt that be the same thing? Like the iShares MSCI Japan for example. Thanks for the explanation!
Hi Phil, EM corporate bonds have much higher volatility compared to Australian government bonds or high grade US or European bonds. We don't currently have an allocation to them in our portfolios. Note that the EBND ETF is actively managed with a fee of 0.95% and running yield of 5.1% which means that you'll pay around 1/5th of your total expected returns away in fees. Here's some more info on EM bonds: www.schwabassetmanagement.com/content/are-emerging-market-bonds-worth-risk
3:51 what is the cost of being hedged though? Are we sure that for a bond etf the hedging cost is not going to be higher the the bond yield itself? In which case we would be better off just holding cash
@@ChrisBryckiStockspot thanks for the reply :) 0.01%-0.03% though? I guess you mean that that is the direct hedging cost, which is usually added to the total expense ratio. I meant the overall cost of hedging: direct + undirect due to the difference in the interest rate of the nominal currency vs the original currency of each underlying
So if Im understanding this correctly hedging is only useful when buying foreign ETF. I'm in Canada and I'm looking at a Canadian gold ETF. So I would want the non hedge one since its in my own currency?
We recommend the unhedged gold ETF for our Australian clients to better protect against a debasement of the Australian dollar. The unhedged gold ETF in Canada would be buying gold with Canadian dollars and therefore protect against a devaluation of the CAD.
The best and least complicated explaination of this. Thank you!
Hi Chris. Thank you so much for your clear and straightforward explanation. You see, I've been thinking of exposing myself to short duration US treasuries, which currently carry a very attractive yield, i.e. the 6-month above 5% and rising, and are not nearly as exposed to bond price drops as long duration. However, at the same time, the US Dollar is at 20-year highs against my currency (the Euro), and selling euros at these prices to buy USD-denominated ETFs doesn't sound like a great plan. I mean, there is a much better potential from currency depreciation than actual profit from the T-bill interest. Would you say this is a good example of when to buy a hedged ETF? This is what I took from the video, but I would appreciate it if you (or anyone who would like to comment) would spare me a few moments to confirm the rationale. Many thanks!
Thank you so much for explaining such a complicated idea in this simple way!
Straight to the point, good. Thank you.
Nice vid. One thing I never hear anyone talk about is that hedging is not perfect. There are significant inefficiencies with hedge due to how it's achieved. Just look at any currency hedged ETF and compare it to the index it's tracking and you will notice that the hedged ETFs underperform the underlying index on a longer term horizon.
May be because of cost of hedging somebody has to pay for it
I think its fine to have most of your portfolio unhedge, if you understand that if your local currency strengthens such that your portfolio returns are lower, that should also be offset over the long term by increased purchasing power your portfolio buys ounce converted to local currency.
Buy both
Great video, really well explained, thank you
really well explained.
Perfect, just what I needed to know. Thanks!
Thank you man. It was really clear.
Hi Chris. Thanks for the informative video. Can I ask on what is your opinion if I buy both hedged and unhedged ETFs? E.g. VGAD and VGS. Thanks.
Very helpful. Thank you
You're welcome!
Mate great explanation video! Do you think it may be a good idea to hedge now into a US stock etf as the American dollar is so high atm!
Thanks for the simple explanation. However, I think you sell yourself short. Your video is not just about hedging FXS fluctuations between USD and AUD. Same principle applies to USD-CAD or indeed USD versus any currency does it not? I trade in Canada and am watching this video in order to get a basic understanding of hedging, not especially the Australian context.
It sounds to me that the short answer is - it depends on...
1. What is the currency of your account
2. What is the currrency of the ETF
3. How strong is your home currency
4. How strong is the ETF currency
5. Which way you think either are going.
Bloody complicated if you ask me.
Thank you for sharing this video with us.
I have a question which may seem stupid: If I hold two different S&P 500 ETFs, would a 50/50 division where one-half is hedged and the other half is not hedged cancel out the risk of currency fluctuations, disregarding other factors such as varying management fees?
Let’s say 50% IVV and 50% IHVV.
I don't understand why some ETFs offer a GBX and also a GBP headed version at the same time, wouldnt that be the same thing?
Like the iShares MSCI Japan for example.
Thanks for the explanation!
amazing, thanks !
Thanks Chris. Are there any implications on your ATO tax form for unhedged gains?
Perfect Explanation! Here's my sub :)
So useful
I’d love some thoughts on emerging market Corp bonds. Van Eck have such an ETF and their white paper on ermerging market bonds is an interesting read.
Hi Phil, EM corporate bonds have much higher volatility compared to Australian government bonds or high grade US or European bonds. We don't currently have an allocation to them in our portfolios. Note that the EBND ETF is actively managed with a fee of 0.95% and running yield of 5.1% which means that you'll pay around 1/5th of your total expected returns away in fees. Here's some more info on EM bonds: www.schwabassetmanagement.com/content/are-emerging-market-bonds-worth-risk
Good video
3:51 what is the cost of being hedged though? Are we sure that for a bond etf the hedging cost is not going to be higher the the bond yield itself? In which case we would be better off just holding cash
Good question. The cost of hedging is usually only 1-3 basis points so much much smaller than the bond yield itself.
@@ChrisBryckiStockspot thanks for the reply :) 0.01%-0.03% though? I guess you mean that that is the direct hedging cost, which is usually added to the total expense ratio. I meant the overall cost of hedging: direct + undirect due to the difference in the interest rate of the nominal currency vs the original currency of each underlying
VGAD or VGS?
Any hedging costs money so where does it come from?
I think USD will go down next year. Shall I buy VFV (unhedged) or VSP (hedged)?
These look like Canadian ETFs? If you think your home currency will increase vs the USD you'd want to own hedged ETFs tracking U.S. shares.
@@ChrisBryckiStockspot other way around mate. If the CAD currency goes down you want the unhedged
So if Im understanding this correctly hedging is only useful when buying foreign ETF. I'm in Canada and I'm looking at a Canadian gold ETF. So I would want the non hedge one since its in my own currency?
We recommend the unhedged gold ETF for our Australian clients to better protect against a debasement of the Australian dollar. The unhedged gold ETF in Canada would be buying gold with Canadian dollars and therefore protect against a devaluation of the CAD.
Thanks!