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3 ETFs to Protect Against Brexit Currency Risk

February 24, 2020


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.

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