Limiting exposure to fx changes

[phillll]

Another question to which I suspect the answer is that fees will eat any advantage!

I currently have a reasonably big exposure (%wise) to USD based stocks. Over the past few months the strengthening £ has knocked a chunk off these. Is there any easy/cheap way to take out the fx risk as a small guy?

Any kind of Google for fx futures gives a sea of "here's how to make £££££££ on fx trading" websites which isn't what I'm looking for.

Thanks in advance!

[DonkeyApple]

Not really is the short answer. You can pretty much hedge out any risk but as you've already observed it's the cost that often negates the point of doing so.

The simplest retail mech is to hold a corresponding short position against the currency but you'll have funding costs of 4-5% so have to weight that up.

It's an interesting aspect at the moment because historically, investors didn't stray much outside the UK market or ADRs but today there's a lot of US centric equity activity and few people ever realise that the FX element can often be the most significant part of the investment.

For short term positions the UK investor has always had the huge advantage of spreadbets for swerving the FX issue but bafflingly, the newer investors opt to use CFDs instead which are the same product but with none of the advantages gifted to a UK resident.

Frankly, the most efficient way to not carry direct FX risk on a US portfolio is actually to hold that portfolio in the form of spreadbets but few people realise the potency of the product as an investment tool and think it's only for gamblers.

[anonymous-user]

If you're worried just buy shares in FTSE businesses that have big US operations and let them worry about hedging their FX. But you won't be accessing the "tech bubble" businesses.

For long term investors I don't see any issue,

2010
£1 = $1.60
S&P500 at 1,000

2021
£1 = $1.38
S&P500 at 4,000

A 300% rise in the market compared with a 14% currency movement. Personally, I wouldn't let the tail wag the dog.

[bitchstewie]

Terry Smith says similar in the Fundsmith AGM video.

Along the lines of if you look at the companies they invest in and go to them in 10 years time and ask them to list the three things that contributed the most to the past 10 years performance would they expect currency fluctuations to be one of them?

No they wouldn't.

[DonkeyApple]

Time horizon is the core factor. If you're holding blue chips over twenty years then it doesn't really matter, all you might decide to do as you approach exit points is hedge out the fx risk if desired or if that aspect is looking favourable or higher risk at a particular point in time.

What we do need to consider is that investing today resembles trading much more than it ever did and customers are handed trading platforms and incentives to carry much shorter investment periods. As a result the fx element can become more significant.

[Fat hippo]

How did you fund the position?
Could you borrow in USD? Depending how volatile it is that you are holding, obviously nowhere near perfect but should (very) high level give you some offset

[Mr Whippy]

DonkeyApple said:

Frankly, the most efficient way to not carry direct FX risk on a US portfolio is actually to hold that portfolio in the form of spreadbets but few people realise the potency of the product as an investment tool and think it's only for gamblers.

Plus no cap gains iirc?

So even more potent in theory, if it’d otherwise be exposed.

[DonkeyApple]

Mr Whippy said:

Plus no cap gains iirc?

So even more potent in theory, if it’d otherwise be exposed.

Yup. No CGT, no fx. You have the funding but set up correctly it's lower than the funding on an fx position. You could even consider being cute with the 75% unencumbered capital such as taking on blue chip, local corporate bonds to generate an income to offset the funding cost but arguably just keeping it in the bank is just easier although suddenly running an offset mortgage becomes even more interesting.

I've been a CFD broker for 20 years but we've always used spreadbets for the tax angle on investing, especially bed and breakfasting and getting probate funds that don't fit into the conventional wrappers in year 1 into a tax free, flexible environment. What's weird is that as more and more people have tax issues fewer and fewer understand the benefits of spreadbets for investment purposes.