Hedging against foreign exchange (FX) fluctuations can be an important consideration when investing in international assets, such as US-based index funds, especially when you have a large investment portfolio denominated in a different currency, like NZD. Here are some factors to consider: Currency Risk: When you invest in foreign assets, you are exposed to currency risk. Changes in exchange rates can significantly impact the value of your investments. If the NZD appreciates relative to the US dollar, it can erode the returns on your US-based investments when converted back to NZD. Hedging Options: Hedging is a strategy to mitigate currency risk. You mentioned that Smartshares offers both hedged and unhedged versions of the same investments. The unhedged version can capture the full gains or losses of the underlying asset and is more sensitive to exchange rate fluctuations. The hedged version aims to reduce currency risk by using currency derivatives to offset potential FX losses. Each has its advantages and disadvantages. Short-Term vs. Long-Term: Currency markets can be volatile in the short term, but tend to revert to a mean over the long term. If you believe that the NZD will eventually return to a more favourable exchange rate with the USD, you might consider using the hedged version of the index fund in the short term to protect against near-term losses while taking a longer-term view for unhedged investments. Diversification: Diversifying your portfolio is essential to manage risk. Consider not putting all your money into a single investment or asset class. Diversification can help offset potential losses in one part of your portfolio with gains in another. Costs: Hedging strategies can incur costs, such as fees for managing currency derivatives. Be aware of these costs and factor them into your decision-making process. Your Risk Tolerance: Your risk tolerance and investment horizon should also guide your decision. If you can't afford to see significant short-term losses in your portfolio due to currency fluctuations, hedging may be a suitable choice for you. Professional Advice: It's a good idea to consult with a financial advisor or investment professional who can assess your specific financial situation and help you develop a strategy that aligns with your goals and risk tolerance. In summary, hedging against FX risk can make sense, especially if you have concerns about near-term currency fluctuations eroding your investment gains. However, your choice between hedged and unhedged investments should be based on your investment goals, risk tolerance, and expectations for currency movements. Diversification and professional guidance can be valuable in managing these considerations. Hope this helps. Regards, Clive Fernandes (Financial Adviser) Director - National Capital Disclosure: I am the director of National Capital, a KiwiSaver advice firm. The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances or contact National Capital.
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“Hey everyone,
curious to know what everyone thinks of hedging against FX.
I have a big investment portfolio that’s been in cash/TD and is ready to be invested into broader range index funds.
My issue is I love funds that are US based ( sp500 etc etc). Now, with NZD at this point, and if it starts going to normal, it’s going to eat away at a lot of my gains.
I know FX will be neutral at the longer term, but giving up 10-15% gains ( assuming it goes back to normal in the next 6 months) is going to cause a dent of almost $50-60k……
Anyone in a similar boat? what have you guys done. My first thought would be to look for hedge funds and go with them?
For example: Smartshares offers 2 similar investments
$USF for SP500 & $USH For SP500. Over the last 6 months. The unhedged has done better ( due to interest rates) while hedged has stayed flat essentially. Missing out alot of the SP500 gains.”
(Original question on Reddit)
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Hedging against foreign exchange (FX) fluctuations can be an important consideration when investing in international assets, such as US-based index funds, especially when you have a large investment portfolio denominated in a different currency, like NZD. Here are some factors to consider:
Currency Risk:
When you invest in foreign assets, you are exposed to currency risk. Changes in exchange rates can significantly impact the value of your investments. If the NZD appreciates relative to the US dollar, it can erode the returns on your US-based investments when converted back to NZD.
Hedging Options:
Hedging is a strategy to mitigate currency risk. You mentioned that Smartshares offers both hedged and unhedged versions of the same investments. The unhedged version can capture the full gains or losses of the underlying asset and is more sensitive to exchange rate fluctuations. The hedged version aims to reduce currency risk by using currency derivatives to offset potential FX losses. Each has its advantages and disadvantages.
Short-Term vs. Long-Term:
Currency markets can be volatile in the short term, but tend to revert to a mean over the long term. If you believe that the NZD will eventually return to a more favourable exchange rate with the USD, you might consider using the hedged version of the index fund in the short term to protect against near-term losses while taking a longer-term view for unhedged investments.
Diversification:
Diversifying your portfolio is essential to manage risk. Consider not putting all your money into a single investment or asset class. Diversification can help offset potential losses in one part of your portfolio with gains in another.
Costs:
Hedging strategies can incur costs, such as fees for managing currency derivatives. Be aware of these costs and factor them into your decision-making process.
Your Risk Tolerance:
Your risk tolerance and investment horizon should also guide your decision. If you can’t afford to see significant short-term losses in your portfolio due to currency fluctuations, hedging may be a suitable choice for you.
Professional Advice:
It’s a good idea to consult with a financial advisor or investment professional who can assess your specific financial situation and help you develop a strategy that aligns with your goals and risk tolerance.
In summary, hedging against FX risk can make sense, especially if you have concerns about near-term currency fluctuations eroding your investment gains. However, your choice between hedged and unhedged investments should be based on your investment goals, risk tolerance, and expectations for currency movements. Diversification and professional guidance can be valuable in managing these considerations.
Hope this helps.
Regards, Clive Fernandes (Financial Adviser)
Director – National Capital
Disclosure: I am the director of National Capital, a KiwiSaver advice firm. The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances or contact National Capital.
