More SMSFs are taking strategic positions in hedged exchange-traded funds (ETF) in order to deal with currency risks, according to State Street Global Advisors (SSGA).
“If you think about SMSF investors typically being at the more sophisticated end of personal investors, absolutely they are aware of currencies and they are using currency strategies when it comes to their portfolios,” SSGA Asia-Pacific head of portfolio strategies Jonathan Shead toldselfmanagedsuper.
“Globally, Australian investors are much more aware of currency and currency risks than investors in Europe or the United States, but one of the difficulties with currency is it’s very hard to implement yourself, that is, a currency hedge.
“So while some SMSF investors might be willing to implement, for example, a direct Australian equities portfolio, it’s very time consuming and risky to try to do your own hedging and that’s why we’ve seen a huge take-up of [structures] such as hedged ETFs on the exchange by SMSF investors.”
Shead added the changing, volatile market conditions worldwide tended not to significantly influence or impact on SMSF attitudes towards currency hedging.
“I suppose in the shorter term, when there’s either a strengthening or weakening of the Australian dollar, that is going to play into how investors think about hedged or unhedged ETFs, but we don’t tend to see volatile flows based on small movements in the Australian dollar,” he said.
“As far as we can tell, most SMSFs are taking strategic, more long-term views on currencies when they take a position in ETFs.”
When it came to understanding hedging strategies, he also warned there were complexities and misconceptions in the marketplace.
“If we take two asset classes like global REITs (real estate investment trusts) and global equities, when you hedge US dollars and buy Australian dollars, the performance impact of that is exactly the same whether you’re doing it inside a global equity portfolio or global REITs portfolio,” he said.
“So it’s going to be a very similar outcome and I don’t know that that’s widely understood in the market at the moment.
“It’s also something that needs to filter through into how investors actually build their portfolio because it does involve a slightly different way of building your portfolio; we just think it’s a slightly simpler way to implement a basic currency hedging strategy.”
