FX costs of investing in sterling shares

[Brendan Burgess]

I am trying to figure out the FX costs of buying sterling shares. The costs are not transparent so we tend to ignore them.

Let's say I buy £10,000 worth of shares in a UK company, hold them for a year and then sell them again and get £10,000. There will be stockbroking costs as well, but ignore those to focus on the FX costs.

The rates for buying and selling notes in my AIB branch were as follows yesterday: 86.45 92
Buy £100 would cost 115.67
Sell £ 100 would get 108.69


Cost of transaction 6%



This is a very significant figure. It may be lower for bank transfers and stockbrokers.



I bought shares in sterling last year and just took whatever rate was calculated by the stockbroker. This is a potentially far more significant cost than the stockbrokers' commission.


Has anyone researched it?



Brendan

 

[strmin]

FX costs depends on the broker. I pay $2.5 commission regardless of the amount exchanged. Plus 0.0002 spread. So for me, its totally insignificant.

 

[Chris]

Yes, fx costs can be significant. What I have done with the two UK based equities I own is buy them on a Euro zone exchange. In my case the two companies I own are both traded in Frankfurt and Euronext. But you do need to look at the daily volume as some shares can be very illiquid.

strmin, would you mind sharing who you use for fx, that amount sounds very good.

 

[strmin]

Interactive Brokers

 

[lyonsa3]

I'm also in the same boat. I recently bought sterling shares. When I checked in my portfolio I noticed they were about 3% down straight away. I know there are trading charges and stamp duty but to be down over 3% shows the money they are making on the FX.
Are there any online brokers that allow you to hold funds in euro, sterling and us dollar at the same time. For example, if you sell us shares the funds would be deposited in a dollar account and they could be used to purchase future us stocks. this would get rid of the costs of FX comission and the spread. Likewise for euro and sterling stocks.

 

[Chris]

I'm also in the same boat. I recently bought sterling shares. When I checked in my portfolio I noticed they were about 3% down straight away. I know there are trading charges and stamp duty but to be down over 3% shows the money they are making on the FX.
Are there any online brokers that allow you to hold funds in euro, sterling and us dollar at the same time. For example, if you sell us shares the funds would be deposited in a dollar account and they could be used to purchase future us stocks. this would get rid of the costs of FX comission and the spread. Likewise for euro and sterling stocks.

One of the brokers I use is Keytrade. I receive regular dividends in US$ and C$, which I can keep in my investment account. I let these build up over time in order to purchase more shares and avoid fx costs. However, I do not receive any interest on this money.

 

[PMU]

This is a very significant figure. It may be lower for bank transfers and stockbrokers.

There should be no FX costs as your broker should charge you the spot rate or the mid rate on the day, or the next day. This will be in their term & conditions. If you think your broker is ripping you off you can always compare their exchange rate vs the reference rate on the ECB’s web site http://sdw.ecb.europa.eu/home.do. If you buy the foreign currency yourself, i.e. pay retail rates and also a service charge, this will seriously negatively impact your return.
The issue is not primarily FX costs but the additional risk you assume by buying foreign denominated shares. Your return will be the return on the (change in price of the share) plus the return on the (change in price of the EUR vs the foreign currency). For example, if you bought the iShares FTSE250 ETF on 1 June 2006 (at 917.5) and sold it five years (at 1,185.0) later in 1 June 2011 you would have made a 29% capital gain if you were a GBP investor. But if you had carried out the transaction in EUR, you would not have gained anything (and would have lost due to transaction costs) as the GBP declined -28% relative to the EUR in that period (from about 0.6847 to 0.87705 GBP/EUR).

The only way I can see to limit FX risk is a combination of position sizing and allocation between EUR and foreign shares (i.e. how much foreign exchange risk are you willing to assume). [I know you could hedge by shorting the price in EUR of the foreign currency, but I don't know if this is either practicable or cost effective for an investor with a small portfolio.]