My super and investment portfolio is heavily exposed to unhedged US assets. While their performance has been really strong for the last few years, they have taken a mighty fall since the Covid-19 pandemic hit. I'm confident that the market will recover eventually, and I am a long-term self-investor. I notice that the US/Australian exchange rate is at near record lows so I was wondering whether a professional adviser thought this would be a good time to hedge my US portfolio? Should I also be putting more into that market at these depressed levels (investments and exchange rates)?
Scott in Hawthorn, Vic
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Thank you for submitting your question. It’s one that I’m sure many investors are currently contemplating.
The downward trend of the Aussie Dollar against the Greenback over the past decade has worked wonders for Australian investors with unhedged USD investments by adding to total AUD returns, whilst also reducing portfolio volatility.
Since December 2014, iShares have been running both a currency-hedged and a non-currency hedged ETF that tracks the performance of the S&P 500, which is the best gauge of large-cap US equities
If you invested $10,000 the AUD Currency Hedged ETF (IHVV) back in December 2014, that investment would be worth $16,058 today. Whilst this might sound like a solid return, investing in the non-hedged version of the iShares’ S&P500 ETF (IVV) would have resulted in your initial investment of $10,000 increase in value to $20,912.
Investing in US assets without currency hedging has the added benefit of reducing portfolio volatility when compared to hedging your currency exposure. Generally, when US markets fall in value, so too does the Australian dollar.
The below chart shows that since the start of the COVID-19 Pandemic induced market sell-off, the iShares’ S&P500 ETF (IVV) has outperformed the iShares’ S&P500 ETF AUD Hedged ETF (IHVV) by 3.52%:
Similar outperformance by IVV over IHVV was experienced when the S&P 500 fell by approximately 16% from September through December in 2018:
The rise of the US Dollar and fall of the Australian dollar during times of economic and market uncertainty can be attributed to the Greenback being viewed as a safe-haven currency due to being held by most central banks as a reserve currency.
Whilst investing in the United States without currency hedging has worked well historically, the future benefits are less certain. If the domestic and global economies produce a strong recovery from COVID-19, we can expect to see the Australian Dollar rise against the US Dollar and thus reduce the Australian dollar value of any unhedged US investments. However, rising trade tensions with China and the risk of a second wave of COVID-19 infections could see the Australian Dollar re-test recent lows.
The appropriate approach for you will depend upon several factors, including:
- Your risk tolerance
- Investment timeframe
- CGT implications arising from your selling existing investments
- Overall portfolio asset allocation
If hedging currency exposure is appropriate for you, there are different ways this can be achieved by selling down your portfolio and reinvesting into currency-hedged managed funds or ETFs. Some managed funds utilise an active hedging strategy that allows the fund managed to hedge currency exposure when they see fit, which can remove your need to regularly monitor and adjust your portfolio. However, switching out of your current holdings and into investments that are currency hedged may create some unwanted capital gains tax consequences.
BetaShares also offers a series of exchange-traded funds that can be used to help manage currency exposure without selling down existing holdings. Although this will tie up some capital that may be better invested elsewhere.
The recent sell-off in global markets is tempting many to make additional investments. Whether or not this is appropriate for you, and where you should be investing, comes down to your goals and objectives, the overall strategy for achieving these goals, risk tolerance, investment timeframe and existing holdings. A financial planner can help you work out the most suitable strategy for your circumstances.
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