Protection from currency variation

[nun]

As I've mentioned before I'm planning on ERing to the UK, however, my investments are
in the US and I'm looking for ways to protect myself from the possibility of a falling dollar.
As a UK/US dual citizen my investment opportunities are limited in the UK as the US has some nasty tax regs wrt foreign mutual funds. I'll probably stick a couple of years of money into to a high interest savings account in the UK as they give better interest rates than the Everbank GBP CD. However, most of my money will still be in $ and held in the USA.

Would an UK index iShare ETF give me some insulation from a falling $ wrt the GBP. I've heard of currency linked ETFs, does anyone know anything about them?

 

[Olav23]

Apparently there is some new US-based ETF symbol "FXE" that is a direct euro play vs. the dollar. Another option might be to use the Spot on the FX echange (USD/GBP or USD/EUR). The spot allows for heavy use of leverage, whereas the ETF trades like a stock. The question is whether you plan to "time" the hedging, or simply buy and hold, in which case, your guess is as good as mine as to the long term prospects of the USD vs the GBP or EUR.

 

[nun]

Apparently there is some new US-based ETF symbol "FXE" that is a direct euro play vs. the dollar. Another option might be to use the Spot on the FX echange (USD/GBP or USD/EUR). The spot allows for heavy use of leverage, whereas the ETF trades like a stock. The question is whether you plan to "time" the hedging, or simply buy and hold, in which case, your guess is as good as mine as to the long term prospects of the USD vs the GBP or EUR.

Thanks, the FXE is the fund I'd heard about

 

[bpp]

Would an UK index iShare ETF give me some insulation from a falling $ wrt the GBP.

Yes; it should be exactly equivalent to buying UK stocks in the UK (except for some cost and tax differences), since the iShares ETF will convert your dollars to pounds in order to buy the stocks.

I've heard of currency linked ETFs, does anyone know anything about them?

Not sure I see the point in your case. You might be better off just converting cash and putting it into a UK bank account, unless the ETF is offering a much higher interest rate or something. (I haven't looked into the currency ETFs, so don't know what yields they offer.)

Bpp

 

[Red-y]

Not sure I see the point in your case.  You might be better off just converting cash and putting it into a UK bank account, unless the ETF is offering a much higher interest rate or something.

I think the OP might be in the same position I am in...younger than 59 1/2 and unable to access substantial US$-denominated retirement funds, due to very unfavourable tax consequences.

In my case I'm 49, have several hundred thousand dollars in US IRAs, 401(k) etc. but retiring to Canada. The USD is depreciating at about 10% a year vs. the CAD so my nest egg is shrinking before my eyes in terms of what it will purchase in the country I'll be living in. And since retirement accounts don't let you purchase foreign currency, the ability to directly hedge currency movements is limited.

 

[cyclone6]

One thing you might want to consider are CDs and MMs from everbank.com...they can be purchased denominated in many, many foreign currencies.

To those who say defecits don't matter, well, nothing happens in a vacuum. Yea, the tax cuts feel good. But if you don't pay your bills - either here at home or ship our dollars overseas to buy all those Chinese goodies - something has got to give.

In this case its been the vallue of the $. A LITTLE fiscal responsibilty would be awfully nice. But I ain't holding my breath, and it doesn't seem we have a party to turn to either...

 

[mathjak107]

the problem with deficit figures are they count all the foreign products we buy but not those nice american dollars that return to us in the billions thru our financial markets and foreign investments

 

[nun]

Yes; it should be exactly equivalent to buying UK stocks in the UK (except for some cost and tax differences), since the iShares ETF will convert your dollars to pounds in order to buy the stocks.

Not sure I see the point in your case. You might be better off just converting cash and putting it into a UK bank account, unless the ETF is offering a much higher interest rate or something. (I haven't looked into the currency ETFs, so don't know what yields they offer.)

Bpp

Thanks it looks like the UK iShare ETF is a good bet.

Red-y has my situation just about right in that I have money in US IRAs 401ks etc and I will be retiring to the UK, but also as a US/UK dual citizen its dumb to buy UK based mutual funds due to the nasty IRS tax regs on them. So unless I expatriate I'm limited in how I can invest in the UK, so I'd like a US based investment that is essentially GBP denominated to avoid currency fluctuations.

The evolving plan is to keep a buffer of 4 years expenses in a UK based long term savings account similar to a CD. The bulk of my investments I'll leave in the US investing most of it in UK and Euopean iShares. I'll also put some in Vanguard Total Market Index and Total International Index.

 

[nun]

Yes; it should be exactly equivalent to buying UK stocks in the UK (except for some cost and tax differences), since the iShares ETF will convert your dollars to pounds in order to buy the stocks.

Not sure I see the point in your case. You might be better off just converting cash and putting it into a UK bank account, unless the ETF is offering a much higher interest rate or something. (I haven't looked into the currency ETFs, so don't know what yields they offer.)

Bpp

Bpp would European index mutual funds like Vanguarde European Index VEURX or Fidelity Europe FUEUX also provide a hedge against the falling dollar?

 

[bpp]

Bpp would European index mutual funds like Vanguarde European Index VEURX or Fidelity Europe FUEUX also provide a hedge against the falling dollar?

Sure, though not as direct a hedge with respect to GBP, since the UK is only about 1/3 of the European market.

Also, I'm ignoring complicating factors, such as how much do European companies depend on exports to the US for their profits? In the extreme case where a country is heavily dependent on exports to the US, then a falling dollar will also pull down that country's share prices. (Japan frequently acts this way.) In that case, owning GBP- or Euro-denominated shares wouldn't necessarily provide as much of a hedge against a falling dollar as one might hope. I think Europe is probably more self-sufficient than Asia in this respect, but I don't have the numbers to back that up.

Bpp

 

[nun]

Sure, though not as direct a hedge with respect to GBP, since the UK is only about 1/3 of the European market.

Also, I'm ignoring complicating factors, such as how much do European companies depend on exports to the US for their profits? In the extreme case where a country is heavily dependent on exports to the US, then a falling dollar will also pull down that country's share prices. (Japan frequently acts this way.) In that case, owning GBP- or Euro-denominated shares wouldn't necessarily provide as much of a hedge against a falling dollar as one might hope. I think Europe is probably more self-sufficient than Asia in this respect, but I don't have the numbers to back that up.

Bpp

Thanks Bpp, it looks like a fairly simple strategy for me when I'm in the UK would be to put the bulk of my money in UK/EURO mutual funds based in the US.

Now I'm set up like this

50% US index
20% International Index
30% bonds, reit etc

I'll probably just switch so that I'm

30% UK iShares
30% VEURX
20% Vanguard Total Stock Index
20% in UK cash and long term savings accounts as my fixed income and buffer.

I should get some growth and reduce the effects of any fall in the $

 

[bpp]

Sure you don't want to keep any Total International? Your new portfolio is concentrated exclusively in Europe and the US. (Which admittedly cover something like 3/4 of the world market capitalization, but there are also reasons besides currency hedging to cast a wider net.) I would probably replace VEURX with Vanguard Total International Index, if it were me.

Bpp