I am UK-based investor and I am trying to understand how to read the performance of Exchange Traded Funds (ETFs) which track major worldwide Equity indices. In particular, there are many ETFs that seek to replicate the performance of the S&P500 index (which we shall take as an example) and I want to be sure I understand correctly where my PnL will come from.
Let us consider one of iShares flagship trackers, the iShares Core S&P 500 UCITS ETF, which Epic ID CSPX. The objective of the ETF is to:
[...] track the performance of an index composed of 500 large cap U.S. companies.
Now, I am trying to understand how the GBPUSD FX rate comes into play if I invest in this ETF within the United Kingdom. The screenshot below shows all the listings of this ETF which are available to UK investors (or at least that is my understanding). Anyway, focusing on those quoted in the UK itself, we find there are 2 versions listed the London Stock Exchange, in US dollars (CSPX.L) and in pound sterling (CSP1.L). My understanding is as follows:
- CSPX.L: the ETF is quoted in the same currency as the underlying index and its components. When investing in the UK, you are actually exchanging your pounds into dollars and then investing into the ETF, which is quoted in USD. When you exit the ETF, you are reimbursed in dollars and you can actually keep them or exchange them immediately into GBP. You have some control over the FX risk.
- CSP1.L: the ETF is quoted in GBP. When you invest, you are actually taking FX risk with no possibility to manage it in some way: schematically, the fund receives your pounds, which are exchanged into dollars and used to replicate the S&P500 performance. When you exit the fund, the dollars need to be exchanged back to pounds at the prevailing rate to reimburse you. Your investment is therefore also increased/decreased by the move in GBPUSD over the investment period.
I am particularly interested in CSP1.L. Is the mechanism I have described faithful? So when investing in the GBP-quoted ETF, you are taking both Equity risk and FX risk (in CSPX.L you at least have control over when you convert your dollars back to pounds).