Why I Own: UC62

October 27, 2014

Natjan SweeneyFIRM: Nutmeg

When did you start using the UBS ETF MSCI Japan 100% hedged to GBP?
We included the holding in our portfolios this year, replacing an existing Japanese equity ETF that we added to portfolios in early 2013.

Why did you choose UC62?
There is good reason to hold Japanese equities in our portfolios. Firstly, we are positive on the outlook for the Japanese economy. Prime Minister Abe’s commitment to raising the level of Japan’s nominal GDP growth via monetary injections, fiscal consolidation and structural reform should benefit business and investor sentiment in the region. While the weakness of the yen has already raised corporate profits, structural reforms should ensure a longer-lasting boost to earnings.

Secondly, Japan has key links to emerging markets. While we remain cautious on many individual emerging market countries, we see Japan as providing a safer proxy for exposure to emerging Asian markets. For this reason, Japanese equities tend to be less correlated to those of the other developed country stock markets. So UC62 provides good diversification within our portfolios.

Thirdly, we expect the Bank of England to be among the first central banks to hike rates, so sterling is likely to continue its appreciation against the yen. We therefore prefer to hedge sterling-yen exposure.

What are the attractions of UC62?
UC62 is a physical, fully replicating product with an effective currency hedge overlay for a small fee [an additional 0.1 percent compared to the non-hedged UBS fund]. It is the cheapest currency hedged product available in the UK with a very low tracking difference versus the benchmark. Over the last year the yen has weakened by 14 percent against the pound, so holding a currency hedged ETF has been the right decision.

How do you use UC62?
We hold small elements of Japanese exposure across medium- and high-risk client portfolios.

Do you find that UC62 is weighted too heavily in any particular area?
MSCI Japan is a market-cap-weighted index and well diversified across sectors. While the TOPIX is a much broader index, the correlation with the MSCI is very high and the MSCI has actually outperformed since the start of 2012.

How do you compare this to other ETFs?
The range of non-currency hedged ETFs is relatively vast. Providers such as Amundi, HSBC, Vanguard, HSBC, db X-trackers and iShares offer a selection of physical and synthetic products which track benchmarks such as MSCI Japan [311 constituents], FTSE Japan index [462] or MSCI Japan IMI [1,171].

What else would you use to replace UC62?
There are many un-hedged funds, but when it comes to the currency hedged ETFs, the available product range is limited. As an alternative to UC62, we would use iShares MSCI Japan, although this has a higher fee structure [0.64 percent].

Risk warning
With investment comes risk. The price and value of investments mentioned and income arising from them may fluctuate and you may get back less than you invest. A movement in exchange rates may have a separate effect, unfavourable as well as favourable, on the gain or loss otherwise experienced on the investment concerned. Past performance is not a reliable indicator of future performance.



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