Why is there such a big difference in performance? Epsecially considering that USD and CHF have almost been 1:1 in the last year? Does that mean the hedging to CHF itself caused 7% more internal fees? Could someone please enlighten me? Thank you.
You got me, no idea why the USD one made 32% in 5 years, and CHF less than 6%. Maybe CHF hedging is just so much more expensive. Or maybe since probably half of the stuff is in USD, then they don’t need to hedge it, so it’s cheaper.
Here the unhedged one, and all returns in USD. The hedged USD one did a much better job than unhedged. I guess if you hedge and your currency gets stronger, you win. If the hedged currency gets weaker then you lose.
AFAIK, hedging cost is the delta between the interests rates of both currencies (so like 3% for CHF/USD). That’s the main reason why bonds don’t make much sense in CHF (CHF denominated or CHF hedged), for amounts where negative interests rates are not charged, holding cash will be cheaper (or you’ll have to go into risky bond territory to get a positive expected return).
No you don’t, because here it’s already kinda done. Here you already have the forward points, which is what the market is offering. There is a BID and an ASK.
This is how I understand forward points, if I’m wrong, someone correct me:
If you will have some future returns in CHF and you want to convert them to USD at the current spot rate, the forward points tell you how much CHF you have to pay today to be able to do it.
So you pay 338 CHF today and in 12 months you will be able to exchange 10’000 CHF to 10’000 USD (because today the rate is 1.00).
But if there is BID and ASK, then these are market prices, yes? So someone is willing to give you these rates. So, naturally, they have to be predicting what the exchange rate might be in the future, in order not to lose on that trade?
Big banks can sell you forwards, yes. Unlikely they take much risk for themselves in doing this, that’s not what banks do. There’s bond market where on one hand there are currently people willing to lock up swiss franks for 30 years at 0.2% interest and on other hand people willing to lock up dollars for 30 years for 2.9% interest, probably with some constructions these two kinds of people can meet and the banks will package it up for you as a forward contract, while taking up minimum risk for themselves in the process
Not bonds, currency forward contracts from some big banks. Securities from the original index + currency forwards is what you’re investing in with hedged ETFs.
The bank they bought forward from will do the rest of footwork to ensure buyers and sellers meet. At the end of the month when contract’s up they will settle the difference in cash: either they pay the bank or the bank pays them, and sign a new contract for next month.