Read this article in the AFR for a lesson in understanding the sometimes unwanted effect of derivatives within a seemingly simple structure such as an ETF. Ignore the Reddit clickbait title and dig into the actual detail as it's very important to understand how FX forwards and other derivatives sit on a revenue account and may have to be distributed.
This shows the importance of good funds management and all the technical components that have to be dealt with. When we set up the hedged ETFs at SSGA, the tax (TOFA) implications of including FX forwards to hedge out the currency exposure was a major component. Hopefully all the ETF issuers received similar calls, not just Blackrock and Vanguard.
If you're providing advice on ETFs, consider the nuances of the FX component as another risk factor. Big shops have significant in house currency management capabilities and the scale for bulge bracket counterparties to manage implementation and even they get it wrong sometimes.
Cheers,
Shaun
Hall Road Investments
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