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Relevance of the following discussion
How can a investor from the UK invest in the S&P500 without being exposed to currency risk?

There are at least the following two low cost ETFs. If I had only seen one of them (or rather if only one existed) I would be a happy person. Instead I am growing frustrated by not understanding the need for these two seemingly equal products to exist (from the very same provider!).

ETF 1 - GSPX

Ticker: GSPX
Name: iShares Core S&P 500 UCITS ETF
Subclass: GBP Hedged
Tracker Index: S&P500
TER: 0.10 %
Exchange: LSE (London)
Provider: iShares
AUM: 34,293.72 Millions
Link: https://www.ishares.com/uk/individual/en/products/286083/ishares-core-s-p-500-ucits-etf-fund

ETF 2 - IGUS

Ticker: IGUS
Name: iShares S&P 500 GBP Hedged UCITS ETF (Acc)
Tracker Index: S&P 500 GBP Hedged Index
TER: 0.20 %
Exchange: LSE (London)
Provider: iShares
AUM: 402.08
Link: https://www.ishares.com/uk/individual/en/products/251904/ishares-sp-500-gbp-hedged-ucits-etf

From the KIID docs, they both use derivatives to achieve the edge.
Why does the IGUS exist though ? Why is he tracking the S&P 500 GBP Hedged Index index? Why does this index even exist in the first place?
Surely, the use of currency hedging is for a GBP investor to have exactly the S&P500 return as if he was living in the USA; the investor should be able to see a graph of the total return of the S&P500 only and know where is money is at. Therefore the only logical thing would be for the usage of the S&P500 as the tracker because by definition that is what we are trying to achieve!! Replicate the S&P500!

The only motivation I can think of for the creation of this hedged index is to set a formal, fixed and descriptive way on how to actually achieve currency hedging - by setting a formula describing what derivatives to hold. Something that might otherwise be at the discretion of the fund that does the hedging.
So, for the GSPX, the fund (i.e iShares) does the hedging on is on account, trying as hard as possible to follow the total return SP&500 (by offsetting currency) and any differences would be apparent on the tracking error to the actual return of the SP&500 - mixed up with TER, broker fees and the like.
While for the IGUS case, the edge is implicitly/passively obtained by holding the securities described in the S&P 500 GBP Hedged Index which already takes into consideration hedging.
In this case you would have a difference between the IGUS ETF and the S&P 500 GBP Hedged Index index due to TER, broker fees on one side, and then this index would have also a difference to the return of the S&P 500 which reflected purely the hedging mechanism.

  1. The above is my hypothesis. I am not sure if I am correct. Do you agree, have something to add or know the actual differences?

  2. Is there anything that more fundamentally distinguishes the 2 ETFs?

  3. What was the driving force behind coming up with this "new" index?
  4. Which one would be better - i.e follows the S&P500 more cheaply? The GSPX has half the TER. This might be eroded if the tracking error is big.

To add to my frustration, of the two, the IGUS ETF is the only I can find as ISA eligible amongst all the brokers I have researched - AJ Bell, Halifax, Fidelity, Hargreaves LansDown, Alliance Trust. The GSPX ETF is never ISA eligible; in fact, often, it doesn't even show for general (i.e. non ISA) accounts.

Extra: Comparison between the two indexes obtained from https://us.spindices.com/indices/equity/sp-500-gbp-hdg for a 10 year period starting at 2009.
S&P 500 vs. S&P 500 GBP Hedged Index between 2009 and 2019

p.s. I know the IGUS is Accumulative and the GSPX Distributive. But that is a detail, I believe, to question at hand.

  • 1
    What is your question? Clearly you know what the difference between the vanilla and currency hedged funds are. – quid Aug 9 at 17:03
  • @quid doesn't the subject line state the question? – RonJohn Aug 10 at 12:47
  • @RonJohn, yes, then the body of the question answers the question. This person clearly knows the difference. – quid Aug 11 at 1:17
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Hedging against currency risk is a poor idea when investing in stocks, because a well-diversified stock portfolio is anyway more or less protected against that risk.

Want proof? Consider this: the dollar declines in value. U.S. people start purchasing more U.S. made products, and similarly foreign customers will import goods from U.S. Thus, when dollar declines in value, your S&P 500 investment increases in dollar value, i.e. in euros, its value stays approximately the same. (Approximately, because I cannot prove that these two movements 100% cancel out each other).

By hedging against this "risk", you would actually introduce risk in the other direction. If dollar declines in value, your S&P investment increases in dollar value, and you gain money from the hedge, so it increases even more!

And more worryingly, in the other direction, if dollar increases in value, you lose from S&P 500 index, and you lose a similar amount of money from the currency hedge. Two-fold losses!

Only when investing in bonds should you hedge against currency risk. However, it probably makes more sense to invest in bonds in your local currency than to invest in foreign bonds and then hedge against currency risk.

  • Interesting comment (although not really answering the question). Where and how can I read more about that ? – Carlos Teixeira Aug 10 at 13:39

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