Without a hedge against volatility, U.S. investors interested in the growth in U.K. markets would be subject to the wild swings in the pound sterling. Since British stock are denominated in the pound sterling, a weaker GBP would mean that USD-denominated returns would be lower after a depreciating in the pound sterling.
For example, over the past year, the non-hedged iShares MSCI United Kingdom ETF (NYSEArca: EWU) rose 11.9% while FXB declined 14.2%.
Meanwhile, currency-hedged U.K. ETFs that provided a purer play on the underlying market have more closely followed the U.K. market over the past year, with the iShares Currency Hedged MSCI United Kingdom ETF (NYSEArca: HEWU) up 29.4%, WisdomTree United Kingdom Hedged Equity Fund (NasdaqGM: DXPS) up 30.2% and Deutsche X-Trackers MSCI United Kingdom Hedged Equity ETF (NYSEArca: DBUK) up 27.0%, while the FTSE 100 benchmark was 27.7% higher.
“When you look at a full year and you look at the U.K., it’s really horrible to believe you went through that unhedged after looking at those numbers,” Bush said. “You got absolutely hammered on the return size and the volatility was also higher.”