Currency exposure of US domiciled funds (an example)

T

Tastebuds

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hi all,

I am trying to understand the currency exposure of the US domiciled ETF portfolio I have in mind
  • USD hedged ETF fund: BNDX
  • Non USD ETF funds: VIGI, VXUS, VNQI
  • USD ETF funds: BND, VTI, VNQ
Let's ignore currency exchange fees and also assume the ETF shares we buy don't change in value to illustrate the different currency exposures of such portfolio:

USD and USD hedged funds,
The profit or loss will depend on whether the USD gets stronger against the EUR after buying (I make profit), or the EUR gets stronger (I make a loss)

Non US exposed funds (EUR based shares)
If I buy today a US domiciled fund, which is comprised by EUR based stock, the currency flow would be:
EUR -> USD -> EUR -> USD -> EUR.

The first EUR -> USD -> EUR part would be at today's FX rate, and the second EUR->USD ->EUR would be at sell day's rate.
So, basically, this is like buying EUR based stock directly, and the USD-EUR currency rate fluctuation will have no impact on the final return

Non US exposed funds (non-EUR based shares)
If I buy today a US domiciled fund, which is comprised by Yen based stock, the currency flow would be:
EUR ->USD ->YEN->USD ->EUR.
The profit or loss will depend on:
  • whether the USD gets stronger against the EUR after buying (contributes to make a profit), or EUR got stronger (contributes to make a loss)
  • whether the YEN gets stronger against the USD after buying (contributes to make profit) , or USD got stronger (contributes to make a loss)

In summary, if I invest today in US domiciled ETFs the best investment case scenario would be if:
  • the USD gets stronger against the EUR
  • all the other currencies that comprise the non USD funds get stronger than the USD

Is my understanding correct?

Thanks
 
Sarenco said:
Your exposure is always to the currency in which the underlying securities of the fund are denominated (and not the currency in which the shares issued by the fund itself are denominated).

The domicile of the fund/ETF is not relevant - EU domiciled funds commonly have a US$ share class.

Discussed in further detail on this thread:-
http://www.askaboutmoney.com/threads/buying-shares-as-a-regular-savings-plan.163231/page-2
Click to expand...

Thanks for the reply

So, in my fictitious example above:
  • multi-country ETF with base currency =USD
  • trading currencies of the underlying assets are in YEN and EUR
the only currency risk will be EUR-YEN, and not EUR-USD nor USD-YEN. Is that correct?

Also, how is the trading currency risk evaluated when you invest in a multi-country ETF hedged to the USD. (i.e: BNDX)

Thanks
 
Tastebuds said:
So, in my fictitious example above:
  • multi-country ETF with base currency =USD
  • trading currencies of the underlying assets are in YEN and EUR
the only currency risk will be EUR-YEN, and not EUR-USD nor USD-YEN. Is that correct?
Click to expand...

Exactly. The base currency is simply the currency in which the financial reports of the fund are prepared. As an investor, your currency exposure is always to the currencies in which the underlying portfolio securities are denominated (YEN and USD, in your example).

Tastebuds said:
Also, how is the trading currency risk evaluated when you invest in a multi-country ETF hedged to the USD. (i.e: BNDX)
Click to expand...

Again, your exposure is to the currencies in which the underlying securities are denominated - except in this case your currency exposure is hedged back to USD. In other words, your currency exposure is (at a cost and therefore imperfectly) "transformed" back to USD.

My personal view is essentially to ignore currency risk when it comes to equity investments - it has a long-term expected return/loss of zero. Invest in a globally diversified portfolio of equity funds/ETFs and retain your fixed-income/cash investments in the currency of your home country (EURO).
 
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