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

[Tsumitate Wrestler]

Of course you lose potential gains if the JPY depreciates, and you would have had real losses if the JPY had appreciated.

Gains, a hedged fund would make currency gain if the yen appreciates. (Disregarding index movements).

Of course you lose potential gains if the JPY depreciates, and you would have had real losses if the JPY had appreciated. We are talking of huge gains and losses here, which completely distorts the index behavior. That is exactly what I want to avoid.

You cannot avoid currency volatility with a hedged fund. You can just increase your exposure in one direction and decrease it in another.

.... but I'm trying to make the case that if you want to avoid the rate fluctuations, you should be buying hedged products with your JPY.

I wish that were the case, but I am afraid your understanding is flawed.

==================================================

Finally, let me close out by quoting the fund manager you are investing with directly.

為替ヘッジあり」「為替ヘッジなし」どちらを選ぶ？
「為替ヘッジなし」と「為替ヘッジあり」はどちらがよいというものではありません。
為替変動の影響を受けた価格変動（比較的リスクが大きい）を受け入れられる人や今後円安に進むと考えている人、もしくは、通貨分散をしたい人は"為替ヘッジなし"を選ぶのがよいでしょう。一方、為替変動の影響を極力減らし、投資対象資産の値動きのリスクのみで運用したい（リスクを抑えたい）人や今後円高に進むと思う人は「為替ヘッジあり」を選ぶとよいでしょう。

（2022年12月28日作成）

Which should you choose: with currency hedging or without currency hedging?
``No currency hedging'' and ``with currency hedging'' are not necessarily better.
For those who can accept price fluctuations affected by exchange rate fluctuations (relatively high risk), those who believe that the yen will depreciate in the future, or those who want currency diversification, it is best to choose "no currency hedging". Probably. On the other hand, if you want to minimize the impact of exchange rate fluctuations and invest only with the risk of price movements of the assets you are investing in (to reduce risk), or if you think the yen will appreciate in the future, you may want to choose ``with currency hedging.''

(Created on December 28, 2022)

https://nextfunds.jp/semi/article67.html

Do you see through the PR talk?


if you want to minimize the impact of exchange rate fluctuations and invest only with the risk of price movements of the assets you are investing in (to reduce risk),
________________
or if you think the yen will appreciate in the future.
________________

When they talk about minimizing risk they are talking about minimizing the risk of the yen appreciating, and they are blatantly saying the product is suited for those betting on the yen appreciating.

Fin

[TokyoWart]

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.

This repeats what others replied but the management fee is not the cost of hedging. I have experience with the cost of hedging from my days as an executive officer for a Japanese multinational company and even in that context it is too expensive to hedge currency to achieve constant currency results and we only hedge in very specific and time-limited situations tied to major non-yen purchases such as M&A. I believe you posted a graph showing that a yen-hedged fund outperformed an unhedged fund recenlty but that is a direct result of the dramatic weakening of the yen over the past few years. If you buy a hedged yen fund now and the yen appreciates you miss out on that reversion to the mean so IF (and I have no idea if this will happen) the yen appreciates against the US dollar and euro in the next few years you will see the hedged fund underperform the unhedged version. If the yen continues to fall the hedged version wins but in every time series the hedged fund also has the added cost of hedging which is reflected in the currency contracts the fund must carry.

[Tsumitate Wrestler]

If you buy a hedged yen fund now and the yen appreciates you miss out on that reversion to the mean so IF (and I have no idea if this will happen) the yen appreciates against the US dollar and euro in the next few years you will see the hedged fund underperform the unhedged version. If the yen continues to fall the hedged version wins but in every time series the hedged fund also has the added cost of hedging which is reflected in the currency contracts the fund must carry.

You have this reversed.

However, I generally agree!

[captainspoke]

Doesn't that depend on which currency you'd be hedging for, or against?

[TokyoWart]

If you buy a hedged yen fund now and the yen appreciates you miss out on that reversion to the mean so IF (and I have no idea if this will happen) the yen appreciates against the US dollar and euro in the next few years you will see the hedged fund underperform the unhedged version. If the yen continues to fall the hedged version wins but in every time series the hedged fund also has the added cost of hedging which is reflected in the currency contracts the fund must carry.

You have this reversed.

However, I generally agree!

Yes, you are correct. (I'll blame it on being jetlagged here in Boston for a work meeting this morning). The main point for the investor is that both hedged and unhedged funds still carry currency risk but the outcomes reverse based on whether your underlying currency appreciates or depreciates against its counterparts and the hedging process itself creates a drag on performance.

[alberto]

Thank you for sharing that article explainig exactly about hedging or non hedging that precise ETF in JPY based on MSCI-World. I agree with all the article says, so if everyone agrees too, I guess this is as far as we can go with this discussion.

I only would like to highlight something important to me: if you plot the hedged ETF in JPY together with the original MSCI-World in USD, you get the same behavior over the long time. That's exactly what I look for, and that's why I prefer hedged.

FIN.

[Tsumitate Wrestler]

I only would like to highlight something important to me: if you plot the hedged ETF in JPY together with the original MSCI-World in USD, you get the same behavior over the long time. That's exactly what I look for, and that's why I prefer hedged.

FIN.

This ...isn't true. Japanese ETFs are pretty young and there isn't a lot of historical data. But the 5 year map paints a grim picture.

Kokusai - 5 years
Us ETF -NH (TKO) - 34.84%
JP ETF - NH (2513) - 87.19%
JP ETF - H (2514) -29.37%
Link:https://g.co/finance/TOK:NYSEARCA?windo ... TYO%3A2514

S&P500 - 5 year
Us ETF - (VOO) 51.72%
JP ETF - UH (1655) 102.88%
JP ETF - H (2563) 24.07%
Link:https://g.co/finance/2563:TYO?window=5Y ... ARCA%3AVOO

.....

[TBS]

...

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.

You asked if it makes sense to hedge with this JPY/USD, and people have given you lots good reasons not to hedge. It is fair enough if a reason does not apply for your specific circumstances, but if you say you that you agree with reasons that I wrote but just don't care about them (e.g. I don't care about higher costs, lower expected returns, complications hedging introduce into portfolio management), what more do you want?

Part of the issue is clearly you hadn't understand that there are costs to hedging that drag on performance and aren't reflected in the fund management fee. I guess you also didn't watch or understand the video I posted, which shared this study which reported hedging doesn't appear to either increase returns or lower the volatility of the returns compared to not hedging. So this point you keep making that hedging will lower volatility is probably unfounded:

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.

The video also included a graph showing that often when major currencies move against each other (like JPY/USD recently), often there is no regression to the mean for decades, which is what you seem to be expecting for JPY/USD.

A few additional points based on your reply to me:
- You conflate fact with your above speculation about what the JPY/USD rate will do now. Higher management & hidden costs of the hedged ETF you bought are a given that will happen. Significant currency fluctuation in the direction you are expecting is your speculation.
- Paying out dividends then reinvesting in NISA is inefficient because it uses up NISA allowance. Internally reinvesting funds are more tax efficient as they can "grow" the amount funneled into NISA. Again you may not care about this if you're never going to be able to fill your shin-NISA allowance anyway, but you asked for reasons and for many on here this will be a big one
- There are many inefficiencies of ETFs paying out dividends you may not be aware of, such as the longer time the dividends stay out of the market before you can reinvest them, and the problem of left over dividends when the remaining DRIP amount is not sufficient to buy another expensive ETF unit. For more info on these issues see this thread.

[alberto]

Let's see if it works now: The point here is that using a hedged fund will drag your replication of MSCI-World a few porcentual points (how many is not really clear as it depends on many things, but in the case of the hedged MSCI-World ETF, the behavior is pretty close to the original MSCI World in USD when there are no crazy fluctuations, and it differs few points when there are), but the huge currency fluctuation will not affect so much to the return. With the unhedged and the big JPY/USD changes that happened lately, the return of the investment was determined by the currency way more than the underlying stock investment itself. If you are happy with that and also strongly believe that JPY will continue weakening for many years, you will get a substantial additional return on your MSCI investment, but if you prefer the stocks themselves to dictate your return (at some additional cost), just don't know what will happen with currencies or you're afraid to suffer big losses in the future if the JPY/USD rate returns to the mean or strengthens, it may be worth losing the cost of hedging to avoid that. That's on each person to evaluate. I hope we can at least agree on this.

[TBS]

just don't know what will happen with currencies... it may be worth losing the cost of hedging...

The default position for anyone who does not know what will happen with currencies, which is in fact everyone - because noone can predict what FX rates will do over the short or long term - should not be a more expensive, complicated, and tax inefficient strategy of using hedged ETFs.