Hi Kaisaul and Evan,
I’m the person who originated the post on theinvestquest. Thank you for supporting the site.
As Kaisaul mentioned, iShares JPM USD Asia Credit Bond Index ETF has two share classes, SGX ticker “QL2” is SGD-denominated, while SGX ticker “N6M” is USD-denominated. Do note that both share classes are invested in the same portfolio of bonds that are entirely denominated in USD.
Evan has explained it correctly, so I have little to add except for an analogy if it helps.
Imagine you paid S$1.37mn to buy a US house, which you then rent out for US$100k per year. Although your initial payment was in SGD, the asset and rentals received are USD-based (similar to an investor buying the SGD-denominated ETF, whose portfolio is invested entirely in USD-denominated bonds).
A year later, assuming the value of the house remains the same (in USD-terms) but USD depreciates against SGD (from 1.37 at time of purchase, to 1.23 a year later), the value of your house will now be “only” worth S$1.23mm, resulting in you making a principal loss of S$0.14mm entirely from FX movements. The US$100k rental you collected is now also “worth less” in SGD-terms.
To illustrate this point in reality, we use the recent performance of QL2 (SGD-denom) vs N6M (USD-denom). The performance has been +8.25% and 15.18% respectively from 23 March to 21 August this year. The performance difference of 6.9% corresponds closely to the depreciation of USD against SGD, as the USD/SGD FX rate has declined from 1.461 to 1.372 ( a change of 6.1%) over the same time period.
From my experience, most ETFs do not hedge FX risk. So if you are looking to reduce currency risks from your bond portfolio, you can 1) buy an ETF that invests only in SGD bonds (such as the NikkoAM SGD Investment Grade Bond ETF), 2) buy a SGD-denominated bond mutual fund that invests in USD bonds (majority of bond mutual funds will hedge out the FX risk for you, if you are paying in a currency that differs from the underlying bond portfolio currency denomination), 3) Use a Mutual Fund Robo-advisor like Endowus (which currently only uses SGD-hedged bond funds).
Hope this helps!