Is it worth to also diversify your assets by currency?


#1

I have not decided in which country I would like to eventually retire - more than likely it will be either in Switzerland or somewhere in Europe.

Let’s assume that I will retire in Switzerland - so eventually what will matter to me is how much CHF I have:
The underlying currency of most of the investments which I will have will be either USD or EURO; of course the value in CHF of my investments which have USD as the underlying currency will be influenced by the exchange rate USD->CHF, and the value in CHF of my investments which have EURO as the underlying currency will be influenced by the exchange rate EURO->CHF.

Initially I was intending to invest in ETFs which are US domiciled only (so as to benefit from tax advantages, compared to Ireland domiciled ETFs - as explained in the great Tax Optimization post written by @nugget). However, given that the value of my investments in CHF, are vulnerable to changes in the exchange rates, is this a good reason to include in the portfolio ETFs which are domiciled in Ireland or Luxemburg which have EURO as the underlying currency? (For example 50% VT + 50% Vanguard FTSE All-World UCITS ETF)

Thanks


#2

Hey runner, search a bit in the past forum posts/discussions. Questions on high dividends, accumulating ETF’s, taxes and now ponderings on the underlying currency of a World-ETF. All your questions have been topics well discussed in the past months, at most a year, so u don’t even have to go far back.


#3

Currency of ETF doesn’t really matter (except for currency hedged indexes), what matters is the currency of underlying stocks. Actually even more important is currency of their revenues/earnings, as that’s what ultimately determines the stock price too. And too bad for you that the swiss economy is so small: biggest swiss company (Nestle) is not at all swiss when you look at its financials, only ~2% domestic sales so lets be honest SMI is a dollar index.


Non-Relevance of ETF Quotation Currency
#4

Okey dokey - I am currently making my way through all posts on this forum (and have been doing so over the past few weeks); I guess that I just have not gotten to the ones that answered my questions yet. (I did, of course, search to see if there was an earlier post which answered my questions before opening these new threads, but I was unable to find any (that’s not to say that there isn’t any)).


#5

@rolandinho I have been searching the forum for quite a while I am unable to find the post which would answer my question about diversifying by currency. If you happen to know, could you please let me know where I can find it?

I have read posts which explain how, for example, world EFT’s are not that vulnerable to currency fluctuation because the companies within the ETF trade in many different currencies. But that’s not really answering my question. My question is a much more basic question: I am thinking about when I would want to sell some of my ETF’s to pay for my living expenses in Switzerland; in which case I would receive USD from the sale of the ETF, and then have to exchange the USD to CHF. If the exchange rate from USD to CHF is not good then I would lose out a lot.
Whereas, if for instance, I had some ETFs which are bought and sold in USD and other ETFs which are bought and sold in EUR then I could chose to cash in my EUR ETF when the exchange rate from EUR to CHF is good and chose to cash in my USD ETF when the exchange rate from USD to CHF is good. I am wondering then if it is work having a portfolio which has both an ETF which is bought and sold in EUR (some world ETF which is based in Ireland say) and also some ETF which is bought and sold in USD (e.g. VT).


#6

You want to own a EUR-denominated ETF, but you could own a USD-denominated version of the same ETF and it wouldn’t make a difference. If Euro is strong, then the price of your ETF in Euro is lower. Is that so hard to understand?

What you’re on about is reducing volatility for a given currency, of which constant amounts you will be spending in the future (CHF). To achieve this, ETFs use currency hedging, but it has been said that it is not suitable for a long term investor - you will only lose money.

You could try to seek assets, which deliver fixed return in CHF, like real estate. If you own a flat for rent, which rents for 2000 CHF/month, you got yourself some steady income, which does depend much on exchange rates.


#7

@Runner, I understand that your question is mainly about “world ETF’s” in different currencies, and you are worried this underlying currency could influence how much CHF you get when u sell, if the “USD to CHF is not good then”.
@Bojack has already explained a bit, let me add with an example:
You buy VWRL in CHF for CHF 100.
You exchange CHF 100 to USD 100 (at current rate 1:1) to buy VT in USD. With IB exchange rate spread is minimal.
Let’s assume the underlying shares are exactly the same, they’re both “All World ETF’s”.
In 20 years, stocks have gone up 1000% in USD terms, and the USD:CHF rate has decreased to CHF 0.50 per USD, because inflation and interest rates was higher in the US or some other explanation.
VT will now sell for USD 1000, you exchange and transfer this to CHF 500.
VWRL will only have gone up 500%, because the CHF strengthened, so VWRL will sell for CHF 500.
The amount when you sell is the same in CHF.

What hedgehog explained is that even a CHF share of a multi-national Nestle will act like a All-World-ETF, going up with profit gains and down as the CHF strengthens against the USD (or more correctly against a basket of average world currencies).

Look at the day / week in January 2015, when the CHF:EUR exchange rate was unpegged. The CHF increased 20% in value against a basket of average world currencies, and at the same time Nestle dropped 20% in CHF, because 98% of sales of Nestle just dropped 20% in CHF terms. The Nestle ADR stayed constant, as in USD nothing had really magically changed in the sales in USD terms. (Actually immediately after unpegging, Nestle “only” dropped 15% in CHF and gained 5% USD, cos it took a while to come back into balance, and the CHF value inside Nestle probably weighs a bit more on the company value than just the 2% sales it makes in Switzerland)


#8

Thanks so much @Bojack and @rolandinho :+1:

@rolandinho that example you gave me was super helpful - i finally understand!