International International Shares - Hedged vs Unhedged?

@dunno (I think) did an excellent explanation a while back of how he tilts from VGS to VGAD based on the historical level of the AUD.

I tried that after the Covid dip and it worked well in the short term, but along with most things I now realise it is easier and most likely more successful to let someone else do it.

The vast majority of my funds are in VDHG, and hence split in some proportion.

 

Was looking for some info on VGAD with the Aussie dollar dropping so much lately. Found this old post and thought I'd resurrect it just to say thanks for all the valuable info and to help anyone else who was starting to consider hedging due to the currency movements.

 

I continue to be too old, too lazy and too stupid to do it myself. Hence VDHG

But were I a younger more aggressive investor pondering VGS vs VGAD, it’d be hard to ignore that the AUD is 15c below its historical level.

Things don’t always revert to the mean. But we have a mean for a reason.

 

If you are investing a lump sum, rather than regular small amounts, it's really hard to go past VGAD compared to VGS. Like others it worked well during the COVID crunch. But if you pick and choose your dates, the FX gain comes to only a little from March 2020 to now! If currency recovers to mean you're again looking strong.

 

Net currency gain is a wash over the very long term if you buy and hold. Although it can go in one direction for many years, I don't believe it can be timed to achieve any consistent gain.

Running a 50% hedged portfolio would be able to reduce volatility during holding period. If you maintain a 50% currency exposure then movements either way will not affect you too much.

My simple three fund portfilio consists of 50% VGS, 10% VGAD, 40% VAS. This way if AUD drops substaintially then most my money automatically gets allocated to VGAD and VAS as per asset allocation without any timing required.

Main reason is to reduce volatility and not to increase expected returns.

 

I would only do vgad short term (1-2 yrs) in the expectation of the dollar returning to mean due to the additional fees in vgad. I'd also have to pay cgt once I sold so haven't decided if I want to throw some small amount of play money at it if the fed does another rate rise and aud drops further along with s&p500, essentially magnifying your gains vs just putting into vgs once things start recovering.

 

The more you buy and sell the more capital gains that you realise.

 

True but I would probably do this regardless as I'm still trying to debt recycle to pay down ppor loan.

 

5 reasons to expect the Australian Dollar to rise (and what investors can do about it)

 

Well, going unhedged could be a good hedge, because when market sentiment turns sour, 'risk assets' like the AUD drop in value, giving international shares a cushion during a downturn.

 

Lots of variables here but personally even as a retiree I only used unhedged.

 

Just looking at VGAD - is there a reason why they haven't paid distributions recently?

If you're borrowing to invest (e.g. debt recycling) - it makes the debt non-deductible???

 

One of the joys of hedged product. Discussed previously here somewhere, curency swaps etc. I vaguely remember Vandguard's hedged managed fund for same not paying any distributions for well over a year at one stage. Some mgrs use TOFA arrangement to remedy this but Vanguard chooses not to. Do a search on "TOFA" as also discussed here in past.

Personally I much prefer TOFU myself.

 

Ughhh. death and taxes.
at least HGBL uses ToFA election?
Note to self: avoid VGAD

Edit: reddit source says the following Betashares ETFs elected TOFA:
HCRED, HGBL, HNDQ, HEFI, HQLT

 

The benefit of TOFA only gives you distribution smoothing but gross returns are the same. The downside of not having TOFA is that you can suddently receive a huge distribution after years of no distribution, and hence a huge tax bill.

Then again, you would be paying no tax in the years prior when there were no distributions, so it does even out a little (and yes volatile distribution hurts more as it can move you to higher tax brackets).

As some previous posters pointed out this tax problem could be avoided by using a company structure so you never pay more than 30%. However, for people like me who are lazy to change structures, just holding a relatively lower position also minimises the damage.

The reason why VGAD hasn't paid a distribution for awhile is because AUD has been trending lower for awhile. If/when AUD goes back up again then be prepared for more outsized distributions from VGAD.

 

hang on, so if I borrowed money to buy VGAD, is the interest deductible during financial years of zero distribution?

 

I believe that’s fine as long that there is an expectation of a dividend although tax experts can confirm.

 

I was thinking, if I envision my future retirement as something that involves a lot of overseas travel, going unhedged might be a good thing . . .

 

Now just reading past posts, I was actually thinking the same thing!

 

That comment about the AUD being a risk asset is pretty funny. I remember AUD going to 1.10 after the GFC...