Does it make sense to continue with the same strategy with this JPY/USD rate?

[alberto]

Hedge Ari ヘッジ有 - Means the Exchange Rate is Hedged so that the instrument moves (hopefully exactly) opposite to the Exchange Rate, so that the result is (hopefully exactly) the movement in the underlying in the Base Currency.

If you invest in the S&P, and the S&P goes up 20% in USD, but the Yen Strengthens 30%, then:
In an Unhedged Fund, you would lose 10% in Yen Terms due to the adverse movement of the Yen reducing the Yen Value of the Dollars, even though the value has gone up in Dollar terms.
On the other hand, if in a Hedged Fund, the Yen Hedge will move in the opposite direction to the Exchange Rate so that the S&P 20% increase in USD will be reflected directly in the Yen value of the Fund which will also go up 20%, removing any and all movement of the currency from the performance of the Fund or ETF.
This has nothing to do with Currency Volatility. The Yen Hedge removes all exchange rate volatility. Volatility is only relevant to the institution providing the Hedge.

I wrote somewhere else:

If the Underlying Instrument goes Up and the Yen Weakens, the gain in USD terms will be amplified in Yen terms.
If the Underlying Instrument goes Down and the Yen Strengthens, the loss in USD terms will be amplified in Yen Terms.
If the Underlying Instrument goes Up and the Yen Strengthens, or the Underlying Instrument goes Down and the Yen Weakens, the gain or loss will depend on the relative movements of the Underlying Price vs. the Exchange Rate. First the gain or loss will be attenuated and then reversed, as in the case above, where the S&P goes up in USD terms, but results in a loss in Yen Terms, or as was the case last year, the S&P went down drastically in USD terms, but resulted in flat performance, even to a profit in Yen Terms due to the opposite weakening of the Yen.
This was great in the direction from 120 to 150, but may not be so good if the exchange rate ever goes back from 150 to 120...

Thank you for all these clarifications. I'm afraid I may not use the correct terms sometimes, but I'm glad the meaning is the same that I was assuming.

[alberto]

Recommended video on this topic: https://www.youtube.com/watch?v=K3flJjh00gA
Should You Currency Hedge Your (Equities) Portfolio?
Ben Felix is neutral on the choice to hedge foreign equities or not in that video.
But these additional factors tip the balance against hedging for us in Japan in my view:

- Hedging costs more: the difference in fund fee between eMAXIS slim All Country and NEXT FUNDS 2514 is 0.05753％ vs 0.187%. In addition there is the additional hidden cost of the hedges in NEXT FUNDS 2514, which is not included in that 0.187% figure.
- The hedged products proposed so far are all ETFs. In Japan these are tax inefficient as they pay out dividends rather than reinvesting internally. You lose out long term from not being able to reinvest the tax withheld from ETF dividend payments. Whereas for mutual funds all the taxes are paid at the end, so there is the opportunity benefit of being able to keep money away from the NTA and invested in the market for as long as possible.
- ETFs cannot be bought in iDECO or tsumitate NISA (including tNISA portion of shin-NISA).
- NEXT FUNDS 2514 is a developed world fund excluding Japan. So it introduces complications to portfolio management not present with an all world fund, including calculating correct weights of other funds to buy and re-balancing periodically. The latter also may involve further tax inefficiencies.
- All of us are foreigners in Japan, which makes us uniquely different from Japanese Japan-based investors. Despite what many of us believe now about staying in Japan forever, there is a small but real chance that many of us will return to our home countries later in life or move elsewhere abroad. Unhedged products offer better currency diversification, and that theoretically that will help protect you if in fact have non-Yen income needs in retirement.

Credit to other posters who have been making similar points.

I agree with most of your comments, and I already commented on most of them. Yes, those are some drawbacks of hedging, but if you look at the actual numbers I have provided, they are absolutely negligible compared to the huge effect that I want to avoid related to currency fluctuation. The difference between 0.2% and 0.06% can seem big, but it's a really small fee in the end, we're not talking about 2% fees of other funds/ETFs. The dividend thing is correct, and I'd prefer the reinvesting option, but within NISA there's no tax effect and you can reinvest it too with the big annual quota we will have from next year. Yes, the ETF excludes Japan, but to invest in Japan there are a lot of funds/ETFs to choose from, so no problem at all there. About ideco and tsumitate, I don't care because I mainly invest using regular NISA, where we will have a big annual quota and you can choose other product for tsumitate in particular, for example Japan, which is not included in this ETF. And about the last one, that depends a lot on your personal situation, I am in Japan actually for a very long term (decades), so it makes sense to avoid the speculation of buying USD with my JPY. As I said, I want my diversification in the stock market, which is where I want to invest, not in other currencies especially when I get my salary and do my spendings in JPY.

These two are incomparable. Equities grow exponentially over the long term, but major currencies tend to show no strong upwards or downwards diverging trend. There is no equivalence here - just because it is wise to invest long term in equities because you believe that they will go up, doesn't imply you also should make a choice to go hedged/unhedged (particularly based on the current FX rate... which is a form of active market timing). The fundamentals underlying what equities and FX rates do long term completely different.

And that was exactly my point, I don't need diversification with currencies because I don't want to include currencies fluctuations in my investing, as I explained before, but only in stocks because that is where I want to put my savings.

[alberto]

For a stock fund investment I would not (in fact never have) choose a currency hedged fund. Hedging is expensive (it is lowering your return) and there are ways in which a currency falling in value can boost that country's domestic stocks when it is an exporting country like Japan.

Have you seen the chart I shared yesterday? The total fee of the hedged ETF is 0.187%. That is not expensive to me. Especially for the service you're getting, which is to remove the currency fluctuation. Yes, the currency falling can boost your return, but if it strengthens, it will kill your return. If you want to add that currency speculation to your investment, that is OK, but that is not what I look for when I invest in a conservative product like MSCI-World.

Your are speculating that the yen will appreciate and you are HEDGING against that possibility.

Exactly

No, not exactly. Please, go to the chart and tell me that sticking almost to the same behavior of the original MSCI-World is speculating, but assuming a fluctuation of 50% with the unhedged ETF is not.

[alberto]

If you buy the hedged ETF, you are buying the MSCI-World exactly like you would buy it in USD (since it's mostly US stocks), eliminating the currencly fluctuations.

This is incorrect. That's not how it works.

If that is not how it works, please explain why, and how it works. If possible, refer to the chart I shared, where we can actually see the behavior in the real world.

You mention the money spent on hedging, but the difference over the biggest JPY/USD volatility in decades is a mere 3% in 5 years (the maintainance fee is only 0.187%, very reasonable for a hedged ETF I think).

The costs of currency hedging are not reflected in the fee.
Did you look at the fund constituents? It literally lists all the forwarding contracts. You are buying those, instead of stock.....
.............
Our concern here is not that you want to buy a hedged ETF, but that you truly don't know what it is, how it works, or the risks.

All the costs are included in that 3% of difference over 5 years compared to MSCI World, in comparison with the 50% of difference with the same unhedged ETF. I accept that 3% over 5 years (under a scenario with the maximum JPY/USD volatility in decades) at the cost of eliminating the other huge fluctuation.

[Tsumitate Wrestler]

I would like to direct your attention to People's Exhibit A.

Further, I would like to repeat that the ETF fee does not reflect the cost of currency hedging. This is clearly laid out in the fund prospectus. The buying of currency forwards is explained in my previous post, that is the mechanism for hedging. I suggest looking through the Investopedia explanation on currency forwards.

A hedged ETF is an index fund AND currency forwards. That is what the fund buys.

https://www.investopedia.com/terms/c/cu ... orward.asp

[alberto]

I would like to direct your attention to People's Exhibit A.
Ex1.jpg
Further, I would like to repeat that the ETF fee does not reflect the cost of currency hedging. This is clearly laid out in the fund prospectus. The buying of currency forwards is explained in my previous post, that is the mechanism for hedging. I suggest looking through the Investopedia explanation on currency forwards.

A hedged ETF is an index fund AND currency forwards. That is what the fund buys.
https://www.investopedia.com/terms/c/cu ... orward.asp

Thank you for the chart, it is very similar to mine, although it doesn't show the original MSCI-World. In your chart, we can see that ~50% difference between the hedged (which is close to the original index) and the unhedged, which is what I wanted to avoid.

About the cost of currency hedging, if you see my last message to you, I did not mention the ETF fee, but only the total difference between the hedged ETF and the original index, and the difference is about 3% over 5 years, including the highest volatility period in decades.

[Tsumitate Wrestler]

I would like to direct your attention to People's Exhibit A.
Ex1.jpg
Further, I would like to repeat that the ETF fee does not reflect the cost of currency hedging. This is clearly laid out in the fund prospectus. The buying of currency forwards is explained in my previous post, that is the mechanism for hedging. I suggest looking through the Investopedia explanation on currency forwards.

A hedged ETF is an index fund AND currency forwards. That is what the fund buys.
https://www.investopedia.com/terms/c/cu ... orward.asp

Thank you for the chart, it is very similar to mine, although it doesn't show the original MSCI-World. In your chart, we can see that ~50% difference between the hedged (which is close to the original index) and the unhedged, which is what I wanted to avoid.

About the cost of currency hedging, if you see my last message to you, I did not mention the ETF fee, but only the total difference between the hedged ETF and the original index, and the difference is about 3% over 5 years, including the highest volatility period in decades.

3% over 5 years

This is a HUGE difference. .6% a year.

https://www.nerdwallet.com/article/inve ... calculator

.....

Disclaimer: I bought 390 shares of ＩＳＳ＆Ｐ５００米国株ヘ (2563) in my taxable this morning.

[Deep Blue]

Yen is on the slide again today.

[alberto]

3% over 5 years

This is a HUGE difference. .6% a year.

https://www.nerdwallet.com/article/inve ... calculator

fees.jpg

Well, that's just a matter of personal preferences and opinions. As I said, it's 3% over the 5 years with the craziest JPY/EUR volatility. In periods of normal volatility, the deviation is negligible, so the original 0.2% fee of the ETF prevails. High or low, that cost isolates you from the uncontrolled and potentially HUGE volatility of more than 1 order of magnitude higher than that 3%. That is the real gambling in my opinion. But everyone has his own opinion, and it's OK as long as we know what we're doing.

Disclaimer: I bought 390 shares of ＩＳＳ＆Ｐ５００米国株ヘ (2563) in my taxable this morning.

That's funny. You just complained about that 3%, but just bought a similar product. Can you explain the reason?

[Tsumitate Wrestler]

3% over 5 years

This is a HUGE difference. .6% a year.

https://www.nerdwallet.com/article/inve ... calculator

fees.jpg

Well, that's just a matter of personal preferences and opinions. As I said, it's 3% over the 5 years with the craziest JPY/EUR volatility. In periods of normal volatility, the deviation is negligible, so the original 0.2% fee of the ETF prevails. High or low, that cost isolates you from the uncontrolled and potentially HUGE volatility of more than 1 order of magnitude higher than that 3%. That is the real gambling in my opinion. But everyone has his own opinion, and it's OK as long as we know what we're doing.

Disclaimer: I bought 390 shares of ＩＳＳ＆Ｐ５００米国株ヘ (2563) in my taxable this morning.

That's funny. You just complained about that 3%, but just bought a similar product. Can you explain the reason?

I plan to hold the fund for less than 1 year. Also, I feel I understand how it operates, I understand the risks, and I understand I am undertaking currency speculation.

Furthermore I understand that holding the fund I'm the medium to long term is likely a poor decision.

In nutshell I am gambling on a BOJ policy shift on October 31 and FED easing in Q1-2 of 2024

.....

Your comments showed that you did not have a firm grasp of the mechanics. I actually made an account just to comment on those errors. (I cannot access former account).