No currency diversification in full USD portfolio?

Hi guys,

Great content here both in blog and forum. I’ve been reading and learning a lot even if I don’t really write until now.

I opened my IB account and started making my first placements in VTI+VXUS for now. Still need to study better bonds.

Three questions arose to me:

  1. Diversification is king, however most of you here seem to recomend a full USD based portfolio. Wouldn’t it be best to have (at least) USD+EUR+CHF? I guess that ultimately the values owned by the fund are in foreign currency but still.
  2. Why you seem to always prefer ETFs over regular Mutual Funds?
  3. Being close to stock market highs, would it be preferable to invest more in bonds? Or are these highly valued too?

Thanks and looking forward to your answers!

Hi @Lumo,

1 - There are many posts in this forum about this topic, one is this one: How do you hedge your currency risk?
The conclusion here is that it doesn’t matter in which currency you buy the ETF as they are all mostly exposed to USD risk. So, if you buy VXUS in EUR it makes no difference. Have said that, I have most of my assets in CHF, will invest in Vanguard (USD exposure) and have some P2P in EUR
2- In summary: Mutual Funds costs way to much (management fee, etc)
3 - nobody really knows where the highest point is. Accepted knowledge says that the earlier you get in with your stock position the better your returns

regards

Swiss mutual funds yes, but american funds can be very reasonable, most of vanguard AUM is in mutual funds. But you can’t buy them as a non-US person. Only ETF shares.

Currency of the fund itself doesn’t matter, it’s just what you buy/sell it for. What matters for performance is what’s inside the fund.

Well correct, but it matters if you are depositing in CHF, the broker is charging you a fee to convert your money to EUR to buy an EUR traded ETF and charging you the same to convert your dividend (or when you sell) back from EUR to your base currency in the broker (CHF) …

That’s has nothing to do with diversification, it’s just a problem with your broker.

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Hi @pandas,

Correct, that is what I said. There are costs on acquiring the fund depending on the currency 8from broker side). This does not relate to the diversification. Even more, if you buy the fund in EUR at one broker you can always move your portfolio to say, a swiss broker and have it all in CHF and from there on buy the same fund in CHF at SIX…

The currency diversification part is separate and as I mentioned done with different products to create the real exposure to the target currency.

Rather than “based”, I would call it “denominated” in USD. For equity funds, the currency in which they are denominated is virtually irrelevant. As you say, at least beyond the short term, it is the exposure of fund holdings to exchange rate fluctuations that matters performance-wise - whereas xposure doesn’t mean denomination of stocks. So for an ETF holding stocks, the currency in which these stocks are traded is (not completely but) largely irrelevant - what rather matters is how currency fluctuations affect companies’ costs of doing business, revenues and earnings.

The matter is obviously very different for bonds, which are essentially just a promise to pay back a certain amount in a specified currency in the future, often along with regular coupon payments til maturity (again, for an ETF holding bonds, the ETFs trading currency doesn’t matter, the bond’s currency does). In this case currency hedging might make sense.

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Thanks for your insights. Ok this makes sense.

Hello,

I’m also concerned about putting a lot of my money to the market (yes, I still didn’t start, I know…), which in principle is based on USD. But does anybody know what would happen, for example if there is huge devaluation of USD? Let’s say you earn in CHF, then you invest in ETFs which are mostly exposed to USD risk. Then the value of USD go down, more or less significantly - what it would mean for me if I want to sell? Will prices of US stocks go up, as they will be able to export the goods/services in bigger quantities due to weak dollar? I think I’m too stupid to take all factors into account and come with a possible outcome of such event.

Another scenario - what if we have hyperinflation? I’m more and more uncomfortable with this money printing…

Finally - the gold. Let’s say I want to buy gold (in CHF) to protect me against armageddon on the markets. Then the dollar goes down. I guess the value of gold expressed in dollars should go up?

PS. I think I’m reading too much of fatalistic content. But it makes so much sense, for example what this guy writes: https://businessoutsiderpl.wordpress.com/2019/07/22/petrodolar-final. Unfortunately, only in Polish, not sure how automatic translation will work, but his posts are worth reading I think.

Best regards

Bonds: Your investment will be toast, without currency hedging.
Stocks: Prices will adjust. To some degree. Maybe overadjust though…

Exporters might also have to deal with rising costs for basic materials. In the end, a lot will depend on how companies are prepared or adjusting to a devaluing USD.

No. If you were able to do so, that is “take all” relevant “factors into account” for a “huge devaluation” of the USD with reasonable certainty (and then explain it convincingly), you should be better quit your current job and forge a career as a sought-after economist.

:wink:

I think it’s just a very complex thing and hard to predict.

It doesn’t matter whether you buy it in CHF or something else.

Since gold (as most things) is primarily traded in USD, the value of your gold in USD will likely go up. On the other hand, USD will devalue against the CHF, thus reducing the effect when denominated in CHF. Also, a “huge devaluation” of the USD is likely to be a major economic shock, which in turn should (at least going by conventional wisdom) drive market participants to the CHF as a safe haven currency.

Yes, it is very difficult to predict consequences of such catastrophic events… But many thanks for your insights!

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