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ETFs are one way to spread your exposure to foreign exchange as Brexit looms
Thursday 01 Nov 2018 Author: Laura Suter

Investors witnessing the current Brexit negotiations, and lack of progress, may be worrying about the impact on their portfolios. We’ve heard from readers who are worried about the impact a no-deal Brexit may have on their investments – but more specifically the effect it will have on the pound.

After the Brexit referendum we saw the value of sterling plummet, as the world grew nervous about the shock vote result and what it might mean for the UK economy. The value of the pound fell to a 31-year low after the vote, and saw its biggest one-day fall in value
on record.


The pound has also failed to recover its pre-Brexit vote levels. It stood at $1.48 before the vote and now is down to around $1.29. It’s the same story against the euro, with £1 worth €1.31 on the day before the referendum and just €1.14 today.

So how can investors, who fear a similar reaction if a no-deal scenario happens, spread their currency risk?

The first thing to consider is how international your holdings are in the first place. Bonds and shares invested in companies overseas will do well if sterling falls in value, as when those profits are converted back into pounds they will be boosted.

This is the same effect we saw after the referendum vote, and the large number of overseas earners in the FTSE 100 saw a bump from the fall in sterling, while more domestically-focused companies were hit harder.

If you want to hedge your currency risk, you could go out and buy currency, in the same way as you would if you were going on holiday and wanted to exchange your pounds for euros or dollars.

However, there is obviously the issue here that you need somewhere safe to store the cash, and the larger the sum you intend to convert the bigger an issue this becomes.

The other problem with this situation is that many people want to limit their sterling risk within their existing ISA or SIPP portfolio – keeping it within the tax wrapper.


If you want to do this your best bet is probably an exchange-traded fund or ETF for short. These funds track the price of different markets and indices, for example the FTSE 100 or the price of oil.

There are ETFs that track the price of the dollar or the euro by giving a delivering a cash-like return in the local currency. One example is Lyxor Smart Cash UCITS ETF USD (STMC), which costs 0.13% a year.

There are also ‘money market’ funds. These products invest in very short-dated bonds (those with a short time to maturity) and cash, and many operate in alternative currencies.

For example, Schroder International Selection Fund Euro Liquidity Accumulation EUR (7226445) invests in euro bonds that have less than 12 months to maturity; or Fidelity Funds II - US Dollar Currency Fund (4152877), which invests mainly in US dollar-listed debt.

It’s worth noting that your platform may charge you a fee for handling foreign currency funds. For example, AJ Bell YouInvest charges 1% on the first £10,000 of investments, 0.75% on the next £10,000, 0.5% on the next £10,000 and 0.25% on anything over £30,000.


If you want to take more risk you may wish to consider an active bet on the value of sterling falling by using an ETF. Some ETFs allow you to ‘short’ different assets or markets, which means you profit if an asset or market falls. In this example, you would be shorting sterling, and so would profit if it fell. If sterling rises in value then you’ll lose money.

These ETFs use complicated derivatives to achieve this result and so are far more complex and harder to understand, meaning they are not for novice investors and you should make sure you understand how they work before committing any money. Because of the derivatives used the funds also typically cost more to run.

One example is Societe Generale FTSE x5 Daily Short GBP (5UKS). The ‘x5’ in the name is because the fund amplifies any change in sterling by five times. This means that if sterling fell by 1% the fund would rise by 5% in value. Conversely, if sterling rose in value by 2% you would lose 10%.

Laura Suter, personal finance analyst, AJ Bell

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