VGS

Question

Hi! I am planning my portfolio targets and have been thinking something like:
40% VAS - Aussie index
50% VGS - international ex Australia
10% VGE - emerging markets

I note that VGS is not hedged against the Aussie dollar. Is this a problem ? Is it better instead to do half/half hedged vs non-hedged international shares ?

For example:
40% VAS - Aussie index
25% VGS - international ex Australia non-hedged
25% VGAD - international ex Australia hedged 
10% VGE - emerging markets

Or is that just adding complexity where it doesn’t need to?

I know you can’t provide individual financial advice but if you can point me in the right direction of how to think about the risks vs benefits of hedged vs non hedged this would be amazing!!

Thank you!

Nikki

Answer

Good question Nikki.

I’m writing an article on this soon, but as you likely know there are pros and cons to hedging.

For the first example portfolio you give, I would consider it perfectly fine to stick with unhedged.  Reason being, roughly half the portfolio is still in AUD, so this gives a balance of currency, meaning you aren’t overly exposed to either extreme (AUD losing value relative to USD etc).

People can debate this of course, but that’s my view on it in this case.  For those planning on having more like 80% of the portfolio invested overseas, then I would definitely consider hedging in that case to provide more of a balance and protect against a poor outcome.

I’ll be writing a detailed article on this in the next couple of months, but hopefully that brief answer helps.

Dave

Answer

Hello Nikki,

Great to hear that you’re planning your investment portfolio with such detail! Your question about hedged vs non-hedged international shares is a common one among investors looking to diversify globally.

Hedged vs Non-Hedged International Shares:

Currency Risk: Non-hedged funds like VGS are exposed to currency fluctuations. This means if the Australian dollar strengthens against other currencies, your returns could be negatively impacted, and vice versa. Hedged funds like VGAD, on the other hand, aim to mitigate this currency risk by using financial instruments to lock in exchange rates.

Volatility and Return: Hedging can potentially reduce volatility in your portfolio that arises from currency fluctuations. However, it’s important to note that hedging also comes with a cost, which can affect the net return of the investment. Sometimes, not hedging can lead to higher returns if the currency movements are in your favor.

Diversification: By having both hedged and non-hedged international shares, you can diversify your exposure to currency risks. This can be a prudent approach if you are unsure about future currency movements or if you want to balance the potential risks and rewards associated with currency fluctuations.

Complexity vs Simplicity: Adding both hedged and non-hedged options does increase the complexity of your portfolio. However, if managed well, it can provide a more tailored risk management strategy. The key is to ensure that the added complexity is something you are comfortable managing and understanding.

Examples of Hedged vs Non-Hedged Allocation:

As you suggested, splitting your international exposure into 25% VGS (non-hedged) and 25% VGAD (hedged) alongside your other allocations (40% VAS and 10% VGE) could provide a balanced approach, mitigating some of the currency risk while still allowing for potential gains from currency movements.

Another investor might choose to simplify their portfolio by selecting only non-hedged or only hedged options based on their outlook on currency movements or their desire to reduce portfolio complexity.

In conclusion, whether to include hedged or non-hedged international shares in your portfolio depends on your view of currency risk, your investment goals, and how actively you want to manage your portfolio. Both strategies have their merits, and the choice often comes down to personal preference and risk tolerance.

At Pearler, we aim to provide you with the tools and options to build a portfolio that aligns with your financial goals and risk preferences. Whether you choose to hedge currency exposure or not, Pearler supports a variety of ETFs that can help you execute your investment strategy effectively.

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Nicole Rumney

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Dave Gow - Strong Money Australia

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