The TER is the hidden rate that you are charged. It is the cost of owning the ETF. Differences between different providers are usually very small. For instance the benchmark World ETF SWDA has a TER of 0.20% but the identical ETF HMWS has a TER of 0.15%.
Over 3 years, the gain of these two ETFs were:
SWDA 37.28% (TER 0.20%)
HMWS 37.83% (TER 0.15%)
So £10,000 invested for 3 years would give us approx. £78 more if we chose HMWS instead of SWDA.
However, we often have another choice to make when deciding which index ETF to buy and that is whether to buy a currency hedged or unhedged ETF.
For instance, we can buy hedged or unhedged versions of the NASDAQ 100, S&P 500 or MSCI World Index.
Over a long time scale, it is usually better to buy the unhedged version, especially if you are dollar-cost averaging. Over a shorter timescale (few years) however, it is often better to buy a hedged version if your local currency is not the $USA and if the dollar rate is consistently falling.
Normally, the difference in performance between a hedged and unhedged ETF is small. This is because Fx rate movements are generally small and the TER charge for a hedged fund is higher than the TER of an unhedged fund.
However, this USD vs GBP chart tells an interesting story...
At the end of 2022, 1 $USD was worth over 90p, today it is worth 74p.
So lets us compare hedged and unhedged World MSCI indexes:
We can see that the hedged version performed better in some years and worse in other years.
However, a 3yr chart clearly shows that a hedged version would have shown significantly better performance overall:
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| The hedged fund was 12% higher over 3 years! |
So my theory is that if the USD exchange rate for your local currency (in my case GBP) is falling, then it is better to buy a hedged fund if that fund holds a lot of US companies.
Hedged and unhedged ETFs of the NASDAQ 100 and S&P 500 show similar differences of 12%-13% over the last 3 years.
Since hedging has shown an average annual gain of 4%/yr this seems to indicate that following the USD rate is actually far more important than worrying about a 0.05% difference in TER!
The great Experiment
All this is theory. I have, in fact already bought a hedged Nasdaq ETF (EQGB) as well as the unhedged EQQQ and the results have been good up to now (EQGB wins over 1mnth, 3mnth, 6mnth, 1yr, 3yr).
My theory is that if USD rate is falling then buy and hold hedged ETFs - if the USD rate is rising then sell the hedged ETFs (inside my ISA so as not to incur CGT) and buy the unhedged version.
So I have set up an experiment. I have purchased both hedged and unhedged versions of MSCI World, Nasdaq and S&P (plus the FTSE 100 RAFI) in a Trading 212 Pie all on the same day for £50 each.
Since the USD Fx rate can change quite a lot over several months, I will not see any useful results for at least 3 months.
Another option is to buy Euro-based ETFs. This would give me (UK share holders) an extra worry. I would have to watch both the USD Fx rate and the Euro Fx rate! However, just for fun, I have also bought a Euro-based MSCI World ETF. This can be compared against a GBP hedged fund and a GBP unhedged fund.
I do not know what is going to happen to the USD and nor does anyone else. However, if I had asked myself the question 'Will Trump's policies weaken the USD?' I think I would have said YES.
This experiment is designed to help in a practical way (not merely looking at charts) to determine if I should have bought hedged funds around Feb 2025.
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| A downward trend indicates I should switch to hedged ETFs |
Over the last 6 months, the hedged versions of these index ETFs have shown a 6-8% gain whereas the unhedged versions have actually lost money in some cases!
However, it seems to me that I should soon switch back to unhedged ETFs. This experiment will be interesting to watch and hopefully will tell me when to switch to unhedged ETFs again!
Subscribe and come back in a few months time to see what the results are.
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