United Kingdom stocks have strengthened on a weakened pound sterling as major exporters enjoy a more competitive currency. While the volatility in the pound may deter some, investors can look to currency-hedged exchange traded fund strategies to take a purer play on the underlying British markets.
The CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) fell 1.7% over the past month as the British pound depreciated to $1.22341. The pound sterling has also experienced some extreme moves in recent sessions on Prime Minister Theresa May’s comments on a potential swift Brexit.
“The pound over the past few days – I don’t know how closely you’ve been watching that; I think it was the last three days – down 1 percent, up 3 percent, down 1 percent, which is absolutely vast,” Robert Bush, ETF Strategist at Deutsche Asset Management, told ETF Trends in a call.
Bush found that over the summer months volatility spikes in the pound shot up to 30% to 35%, a tripling of normal volatility to a level that would be high even for an equity, which is almost unheard of in the foreign exchange markets.
“The pound volatility of the summer and the past few days is quite interesting,” Bush said. “If you look at the pound over the last 3 or 4 days, that looks to me like a whole lot of pain you’ve put into an unhedged portfolio that you didn’t need to have.”
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.”