3 ETFs to Protect Against Brexit Currency Risk

ETF providers now offer well over 100 currency-hedge options for UK-based investors concerned about the volatility of sterling during the Brexit crisis

Kenneth Lamont 8 July, 2019 | 9:34AM
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As a UK investor, when you buy – let’s say – an S&P 500 ETF, you are tracking the movements of the US large-cap equity market, but you are also left at the mercy of the USD/GBP exchange rate.

This is not a trivial point. Since the Brexit vote in 2016 the pound has dropped 15% against the Dollar, boosting already strong US equity returns to unhedged investors.

But with a lot of uncertainty still surrounding the outcome of Brexit negotiations, you should consider protecting your portfolio against increased currency volatility – in particular to hedge against a sterling recovery.

Thankfully, ETF providers now offer well over 100 currency-hedge options for UK-based investors which offer protection from this additional risk. These funds mitigate (rather than fully eliminate) the currency risks, leaving fund returns tied closely to those of the underlying markets.

The following are stand-out core equity ETFs which can be bought to protect your portfolio against a strengthening Pound. 

Firstly, the GBP-hedged Xtrackers S&P 500 ETF (XDPG), with an ongoing charge of just 0.09% is amongst the cheapest and most efficient ways to tap a market which is a primary building block in most investors’ portfolio.

The hedged options are not limited to single currency exposures either- the Xtrackers MSCI World GBP Hedged ETF (XDWG) offers global equity exposures protected against the movements of a global basket of currencies for a competitive ongoing charge of 0.29%.

Due to their less volatile nature, currency fluctuations often play an even bigger role in the returns of fixed-income holdings.

The Vanguard Global Aggregate Bond GBP Hedged ETF (VAGS) offers low-cost currency-shielded exposure to global investment grade bonds for a low fee.

Unfortunately hedging comes at a cost. While some costs like management fees are clearly visible, others like the cost of maintaining the hedge are less easily identified. Although both costs ultimately show-up in how closely the ETF tracks its index.

Ultimately, the decision to hedge can save your portfolio from unwanted currency risk, but it must be understood that this comes at a cost.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Vanguard Global Aggt Bd ETF GBP H Acc23.69 GBP-0.19Rating
Xtrackers MSCI World ETF 2D GBP H21.37 GBP0.43
Xtrackers S&P 500 ETF 2C - GBP H8,305.99 GBP0.58

About Author

Kenneth Lamont  is a passive funds research analyst for Morningstar Europe.

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