Currency risk with ETFs

Hello,

I am just starting with FI and have already quite a bit but I am still worried about the currency risk as most of the ETFs are in USD or EUR and basically there is simply no CHF ETF which is worth their TER (please correct me if am wrong here).

To make things worse it will soon not even be possible to buy Vanguard ETFs in USD because of the regulations. In my opinion USD is less risky than EUR but again that is my opinion.

So for me as a new FI person I have to buy my ETFs in EUR and have to cope with that currency risk.

For a starter I am considering the following two ETFs on the Euronext Amsterdam exchange:

  • Vanguard FTSE All-World UCITS ETF Distributing (IE00B3RBWM25)
  • Vanguard S&P 500 UCITS ETF (IE00B3XXRP09)

Note that these are two ETFs which are on the free ETFs list of DEGIRO (https://www.degiro.ch/data/pdf/ch-en/Free_ETFs.pdf) so they “only” cost me 0.1% for the currency exchange fee from CHF to EUR. No transaction fees.

But again placing a large part of my money in a foreign currency such as the EUR feels scary. Maybe I am missing an important FI concept here? Do you people from the FI community simply ignore the currency risk because for example it is anyway for the long term?

I am looking forward to hear your opinion.

Cheers,
Mabi

Trading currency of ETF doesn’t really matter. Much more important what’s inside. You can buy S&P 500 paying CHF, USD or EUR, doesn’t really matter, it’s still the same basket of stocks in the end. There is no extra currency risk added by just buying it in a different currency at spot rates; currency risk is in the composition of its holdings.

Except if you buy currency-hedged ETFs - then besides the basket of stocks you’re also buying currency forwards and then the currencies matter.

In case of equities also important the revenue exposure of companies. Nestle is a swiss company, quoted in CHF on SIX, but they make only ~ 1% revenue from Switzerland. It’s not swiss at all from this perspective, but a global conglomerate that just happens to be headquartered in Switzerland for historical and tax reasons. In case of a massive appreciation of swiss frank vs. rest of world, everything else equals, it’s a sure thing Nestle’s revenues are gonna get hurt and its stock price in CHF is gonna crash - its currency risks are in revenues exposure.

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To illustrate pandas‘ point, you can buy that very same ETF in USD, GBP or even CHF at SIX Swiss Exchange.

Thank you pandas, I now understand that it is the underlying currencies of the ETF which counts. As such I would deduct that the S&P 500 ETF must be more risky in terms of currency as 100% of this ETF is in USD whereas the All-World covers many different currencies. So finally I should not care much about that.

Think Apple or Boeing - around 35% of revenues of S&P 500 companies are earned outside of the US.

True, but then buying in CHF in the case of using DEGIRO like me, would generate some transaction fees as the CHF version of this ETF is not on their free ETF list. I wonder if really anyone does that…

Good point, I didn’t think about that… think global would be the keyword here I guess.

Ultimately it depends on where (in which currency) the constituent companies incur their costs and earn their revenues - and how that might change due to currency fluctuations.

I’ve read though that S&P has a stronger “home bias” than European stocks, so it’s somewhat true…

…though you might also incur currency conversion costs (when earning in CHF and trading in EUR).

But just as you said, it is and you should look at it as a question of transaction costs :slightly_smiling_face:

The ETF in EUR might be free. But you pay currency exchange fees to Degiro plus the smallish “market connection fee” (annually around 3€ per exchange other than SIX).

So, calculate what’s it gonna cost you in total to buy it in EUR vs CHF and go with the cheapest option.

And jeeeez you sound like a poor person if you’re deciding based on what’s in their free list. I’m at IB and transaction costs are next to negligible and are the last factor in my decision making. Holdings, TER and tax implications are way more important.

Always choose the most liquid ETF on the most liquid exchange. This is going to save you way more than some lousy 2 EUR on fees.

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I would love to do that and therefore chose the NYSE Arca for VT ETFs in USD but the problem is that I read on this blog that 1) there is an issue with having more 60k and succession and 2) by some new regulations it should soon or now(?) not possible anymore for a Swiss citizen to buy VT ETFs in USD on the NYSE.

I have the feeling I am sort of forced as a FI beginner to consider only ETFs in EUR on the Euronext although liquidity is not as good as on the NYSE. On the SIX market in CHF I assume it is even less liquid.

So how do you FI people cope with that? am I missing something?

For reference the DEGIRO currency exchange fee is 0.1%. Is this a scam or not too bad?

There is no issue

You can still buy now and should be able to sell later. It’s not 100% certain that even buying will be affected as the law has exclusions for execution-only brokers.

IBKR’s is 0.002%

That’s great news, because I’ve been reading so much around about this topic and it is really not clear.

Fantastic that means like only 2 CHF for exchanging 100k! What a rip off this DEGIRO, I will ditch DEGIRO and move on to IB and get my VT S&P and VT World in USD on the NYSE Arca.

Liquidity in ETFs is totally different to normal shares: https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.vanguard.nl/documents/understanding-etf-liquidity.pdf&ved=2ahUKEwie4Or6s8bnAhWmwqYKHdPCD4EQFjAAegQIAhAB&usg=AOvVaw1p7m4cQkjspNk3IssIAljX

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