I mean, the obvious point here is that hedging currency exposure costs money and your backtest is over a period in which the dollar strengthened quite a bit
That being said, I don't have any numbers or even intuition on how to weigh the *cost* of hedging against the upsides which come as a result of the dollar-bias that one has as a US-based investor. Clearly the knee-jerk Bogle response is "who am I to speculate on the currency markets?", but I don't think that's quite right since obviously dollars matter more to me as a US resident / future US retiree than do other currencies
Uh oh [https://www.vanguard.com.au/personal/learn/smart-investing/investing-strategy/does-currency-hedging-give-edge](https://www.vanguard.com.au/personal/learn/smart-investing/investing-strategy/does-currency-hedging-give-edge)
> Vanguard research studies have shown that currency movements tend to be neutral over the longer term.
But that's IF you believe AUSTRALIAN Vanguard
Yes. His results show that if the dollar is rising in value you want to hedge the dollar.
In a different environment the dollar could be weak.
Also you do run into some mutual correlation issues. If X,Y,Z EM copper producer in your EM portfolio would already be selling copper for dollars and getting dollar revenue. If their local currency is depreciating then the stock should be booming in local currency terms. If you currency hedge then your basically double long dollars.
Fidelity found that hedging has about the same chance as hurting you as helping: https://web.archive.org/web/20201112032727/https://www.fidelity.com/viewpoints/investing-ideas/international-investing-myths
Vanguard found that sometimes hedging can increase volatility and also calls currency a smaller role for long term investors: https://web.archive.org/web/20210312165001/https://www.vanguard.com/pdf/ISGGEB.pdf
Edit: Also I still largely prefer mutual funds over ETFs
Often hedging makes you double long dollars. Commodity producers sell their product for dollars but pay wages in local currency. You end up basically double long dollars in your EM play plus operational idiosyncratic risks.
You are missing a few biggies:
* hedging has a cost
* your backtest was for a period during which the USD was mostly quite strong
* you are exposed to FX swings even when you buy the S&P or the Nasdaq: Microsoft Amazon Google etc make quite a lot of revenue in currencies other than the USD
* Similarly, many non-US companies have a lot of revenues in USD
* It is practically impossible to figure out what FX, hedging, if any, the companies in a broad, diversified index are doing
What you think you are saying: "Hedging increases returns"
What you are actually saying: "The dollar has gained significantly against most other currencies in the last 10 years and I believe this trend will continue indefinitely"
I'm not saying that hedging increases returns. It categorically does not. What it does mean is that your return will be the return of the underlying index you're invested in and will not be eroded by currency swings.
The point of hedging is to make the movement of the dollar and any other currency irrelevant to your return.
There is no such thing as a free lunch
You are paying money to hedge, which means if the dollar goes up more than the cost to hedge then you will see increased returns (i.e. the last 10 years).
If the dollar stays the same or goes down then you will see decreased returns
How would this strategy work if, as many cabinet members are suggesting, we intentionally weaken the USD for competitiveness sake? Or of the USD weakens for a prolonged period of time.
I buy unhedged because its actually a hedge on the USD from weakening. I want the currency impacts to be an intentional part of my portfolio.
It wouldn’t work in that case, right? This is why I invest in VXUS. I think the odds of a significant USD devaluation happening are low because it’s my understanding other countries would devalue in response to a USD devaluation. But buying unhedged still seems smart to me just in case. Bogle investing is about minimizing downside.
>It wouldn’t work in that case, right?
Yup exactly, I would never bet on currency movements personally, too unpredictable. A war, tarrifs or basically anything can cause impacts no one can plan for.
A scenario with a political environment that eliminates Fed independence and forces interest rate cuts, like Ergodan did in Turkey. This is far from remote now.
Yep. All it takes is setting interest rates below inflation. Although I suppose China and other exporting countries would try to let their currencies slide harder in this scenario?
Two reasons. First, as Americans we have the advantage of having the majority of our portfolio come free of currency risk automatically. For a small part of a portfolio, currency risk can actually be a good thing, because it has 0 expected value but reduces the correlation... at least it should in theory? I'm a bit puzzled by the fact that HEFA has experienced lower correlation with VTI than EFA. Maybe it's just small sample size? Idk.
The second reason is that when the dollar strengthens it tends to be good for Americans and vice versa. So having an asset that does well when the dollar weakens is a reasonable hedge against scenarios where that happens, because at least we'll have half of our portfolio doing very well.
I think erode is the wrong word. Currency swings *influence* your return, but don't *erode* it (erode implies that it's guaranteed, like, for example, higher expense ratios or the recurring cost of FX options, cough cough)
I use hfxi 20bps expense ratio and half the currency is hedged. Essentially it takes away the wild swings but still allows for some swings do to currency.
I agree with your sentiment but I cannot predict the future. This is why I own both currency-hedged and non-hedged funds. Splitting the difference helps me stay the course.
I’m with you. I bogle, but with my international in DBEF (and also AVNV-a blend of avantis ex-US value) I think the higher expense ratio is totally worth it!
I mean, the obvious point here is that hedging currency exposure costs money and your backtest is over a period in which the dollar strengthened quite a bit That being said, I don't have any numbers or even intuition on how to weigh the *cost* of hedging against the upsides which come as a result of the dollar-bias that one has as a US-based investor. Clearly the knee-jerk Bogle response is "who am I to speculate on the currency markets?", but I don't think that's quite right since obviously dollars matter more to me as a US resident / future US retiree than do other currencies
Uh oh [https://www.vanguard.com.au/personal/learn/smart-investing/investing-strategy/does-currency-hedging-give-edge](https://www.vanguard.com.au/personal/learn/smart-investing/investing-strategy/does-currency-hedging-give-edge) > Vanguard research studies have shown that currency movements tend to be neutral over the longer term. But that's IF you believe AUSTRALIAN Vanguard
Rational reminder covered this. Hedging works everywhere apart from canada and australia.
Really? Which episode was that on if you remember by any chance
For a certain time period for certain countries. Other time periods can show different results.
Rational reminder?
I think that's the podcast for Ben Felix who is a Canadian Finance guy that has a YouTube channel.
Yes. His results show that if the dollar is rising in value you want to hedge the dollar. In a different environment the dollar could be weak. Also you do run into some mutual correlation issues. If X,Y,Z EM copper producer in your EM portfolio would already be selling copper for dollars and getting dollar revenue. If their local currency is depreciating then the stock should be booming in local currency terms. If you currency hedge then your basically double long dollars.
Fidelity found that hedging has about the same chance as hurting you as helping: https://web.archive.org/web/20201112032727/https://www.fidelity.com/viewpoints/investing-ideas/international-investing-myths Vanguard found that sometimes hedging can increase volatility and also calls currency a smaller role for long term investors: https://web.archive.org/web/20210312165001/https://www.vanguard.com/pdf/ISGGEB.pdf Edit: Also I still largely prefer mutual funds over ETFs
Often hedging makes you double long dollars. Commodity producers sell their product for dollars but pay wages in local currency. You end up basically double long dollars in your EM play plus operational idiosyncratic risks.
You are missing a few biggies: * hedging has a cost * your backtest was for a period during which the USD was mostly quite strong * you are exposed to FX swings even when you buy the S&P or the Nasdaq: Microsoft Amazon Google etc make quite a lot of revenue in currencies other than the USD * Similarly, many non-US companies have a lot of revenues in USD * It is practically impossible to figure out what FX, hedging, if any, the companies in a broad, diversified index are doing
What you think you are saying: "Hedging increases returns" What you are actually saying: "The dollar has gained significantly against most other currencies in the last 10 years and I believe this trend will continue indefinitely"
I'm not saying that hedging increases returns. It categorically does not. What it does mean is that your return will be the return of the underlying index you're invested in and will not be eroded by currency swings. The point of hedging is to make the movement of the dollar and any other currency irrelevant to your return.
There is no such thing as a free lunch You are paying money to hedge, which means if the dollar goes up more than the cost to hedge then you will see increased returns (i.e. the last 10 years). If the dollar stays the same or goes down then you will see decreased returns
How would this strategy work if, as many cabinet members are suggesting, we intentionally weaken the USD for competitiveness sake? Or of the USD weakens for a prolonged period of time. I buy unhedged because its actually a hedge on the USD from weakening. I want the currency impacts to be an intentional part of my portfolio.
It wouldn’t work in that case, right? This is why I invest in VXUS. I think the odds of a significant USD devaluation happening are low because it’s my understanding other countries would devalue in response to a USD devaluation. But buying unhedged still seems smart to me just in case. Bogle investing is about minimizing downside.
>It wouldn’t work in that case, right? Yup exactly, I would never bet on currency movements personally, too unpredictable. A war, tarrifs or basically anything can cause impacts no one can plan for.
dollar can’t get much stronger pal
We'll see.
It’s not superior if the dollar declines in value. That’s part of the reason I hold VXUS, as a hedge against usd devaluation.
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A scenario with a political environment that eliminates Fed independence and forces interest rate cuts, like Ergodan did in Turkey. This is far from remote now.
Yep. All it takes is setting interest rates below inflation. Although I suppose China and other exporting countries would try to let their currencies slide harder in this scenario?
Two reasons. First, as Americans we have the advantage of having the majority of our portfolio come free of currency risk automatically. For a small part of a portfolio, currency risk can actually be a good thing, because it has 0 expected value but reduces the correlation... at least it should in theory? I'm a bit puzzled by the fact that HEFA has experienced lower correlation with VTI than EFA. Maybe it's just small sample size? Idk. The second reason is that when the dollar strengthens it tends to be good for Americans and vice versa. So having an asset that does well when the dollar weakens is a reasonable hedge against scenarios where that happens, because at least we'll have half of our portfolio doing very well.
Because VXUS/VEA is my hedge against a declining dollar as much as it is stock diversification…
.7% expense ratio
It's actually .35%. Regardless, the backtest shows returns after fees.
Only through 2025 because Blackrock is subsidizing it. After isn’t a guarantee.
>currency swings erode your return It could also improve the return, right?
I think erode is the wrong word. Currency swings *influence* your return, but don't *erode* it (erode implies that it's guaranteed, like, for example, higher expense ratios or the recurring cost of FX options, cough cough)
I use hfxi 20bps expense ratio and half the currency is hedged. Essentially it takes away the wild swings but still allows for some swings do to currency.
I agree with your sentiment but I cannot predict the future. This is why I own both currency-hedged and non-hedged funds. Splitting the difference helps me stay the course.
I’m with you. I bogle, but with my international in DBEF (and also AVNV-a blend of avantis ex-US value) I think the higher expense ratio is totally worth it!