Without stating the obvious, the difference in returns for individual US shares would have been of the same magnitude.
Hedge currency risk using a spread bet or CFD
Hedging currency risk may sound complicated, but in reality it is relatively simple. Investors can use a derivative contract such as a spread bet or a CFD contract to reduce the effect of unfavourable exchange rate movements.
To hedge out currency risk when buying international shares, you need to sell the currency in which the shares are denominated in and buy your domestic currency. If you need to buy GBP and sell USD, you would buy contracts in the GBP/USD currency pair.
For example, if you had £10,000.00 to invest and decided to buy shares in Apple, at an GBP/USD exchange rate of 1.30562, you would end up with $13,056.20 worth of Apple stock.1
Assuming the same GBP/USD exchange rate, $1.30562 can be exchanged for £1. In this case, GBP is your base currency and USD is the quote currency. In line with the example above, it would cost you $13,056.20 to buy £10,000.00.
You could do this by buying one CFD contract in GBP/USD. As a general rule, one CFD contract is worth 10,000 of the base currency.
If you had bought £50,000 of Apple shares, you would simply buy 5 CFD contracts in GBP/USD to hedge out your currency risk.
Investors can choose to use a spot contract or a forward contract. If you are planning to hold your position for more than a few weeks it can be cheaper to use a forward contract. This is because you do not pay an overnight funding fee on forward contracts.
But unlike spot FX contracts, which stay open for as long as you wish to hold the position, forward contracts have an expiry date. At the end of each period, you can choose to automatically roll your exposure into the next forward contract to maintain your position.
Learn more about hedging with spread bets and CFDs
Using exchange traded funds to hedge currency risk
There are two ways to use exchange traded funds (ETFs) to hedge currency risk. Investors can either buy an exchange traded currency or an equity ETF with an in-built currency hedge.
Exchange traded currency (ETC)
ETCs are financial products that provide investors with exposure to currencies that track the value of a currency or a basket of currencies. These can be used to speculate on a currency pair as well as hedging currency risk.
WisdomTree is an ETF company which specialises in currency ETFs. The largest ETCs listed on the London Stock Exchange (LSE) by fund assets are shown in the table below:2
