Non-Relevance of ETF Quotation Currency


#1

Hey guys, what is the problem with the European based ETF (like VUSA which is tracking the same thing as the VOO - VUSA is still available on DEGIRO)? I’ve been reading a lot about the difference since the new rules on DEGIRO and I still can’t find a convincing answer. I think there is the FX rate that plays in this, but this can play for or against the investor and in the long term it averages itself. Any thoughts or explanations on this?


US-ETFs (VT for instance) not available anymore in Switzerland!
#2

FX doesn’t matter when investing in stocks / stock funds, it’s not the currency that you’re investing in. Jeez, this q pops up so often enough that it’s annoying, maybe it should be in FAQ or school curriculums or something if they even teach financial literacy in school these days

It’s true that there’s a small markup to NAV*interbank rate, but 1) that’s not something that will “play for or against the investor and in the long term it averages itself” but should theoretically always be a positive cost, and 2) last time I checked, if you go for most liquid and highly traded ETFs and at a time when both markets are open, it’s actually very reasonable, certainly not your retail bank’s/travelex/some other shithole’s ripoff exchange rate that we’re talking about here. You can thank HFT and algotrading shops for this.

The bigger issue with non-US ETFs investing in US stocks is that you lose 15-30% dividend withholding taxes to US that you can’t reclaim later in your swiss tax return. At 2% div yield that’s basically equivalent to 0.30-0.60% TER increase

Another issue with non-US securities in general is sky high trading costs, 0.1% that’s not something you’d see on the US markets


#3

I don’t know if you think you sound more convincing by speaking like that, for me you just sound more like an AH tbh :slight_smile:

Just for the sake of education, here is a link about the effect of currencies on ETFs: https://www.justetf.com/uk/news/etf/the-effect-of-currencies-on-etfs.html

Some fund managers even create a Currency-Hedged Fund to compensate the effect of the currency fluctuation.

They should’ve probably checked with you before doing that :slight_smile:


#4

Before trying to “educate” knowledgeable members, you should really have searched the forum, because your link really casts doubts about how you think about ETFs and shares:

  • If you believe that a share is a piece of paper whose price bounces around, then yes be my guest, quotation currency will be very important for you… (this is what your link is saying)
  • if on the other hand you would have believed that a stock is an shared ownership of a business, and thus a claim on the earnings of this business, then its quotation currency should not matter at all to you, but instead the currency in which the earnings are made.

Fiat Chrysler is quoting in Milano (Borsa Italiana) in Euros, yet 70% of its business is done in North America… Does the EUR quotation currency matters? Not at all, here USD matters much more.

Or even simpler, let’s take a Swiss listed company: Nestle. You are a swiss investor, you buy a stock quoted in CHF… according to you, there is no FX risk. Except that Nestle makes most of its business in India, and thus what matters are the earnings made in Indian Rupee…

Now for the next level: if you buy an ETF invested in multinational companies, whose businesses are making earnings all over the globe, does it really matter if the ETF is quoted in USD, CHF, EUR or what else? I hope that by now you will have grasp that it does not. What you are buying are earnings, not a piece of paper.


#5

I think “knowledgeable members” should educate themselves first on how to have a decent public discussion, there is a link in this forum that might be helpful: https://forum.mustachianpost.com/guidelines

Second thing, thanks for what you have shared, but have you even read my post? I was comparing VOO to VUSA. Both of them are using USD as underlying currency but you buy VOO in USD while you buy VUSA in CHF, EUR or GBP …

If you didn’t like the link I share, maybe you can check this one, it’s on investopedia: https://www.investopedia.com/stock-analysis/2013/the-effects-of-currency-changes-on-international-etfs-ewz-pid-ewd-dxj0213.aspx

Let’s take a simple example of how FX impacts an EFT performance (and include it in financial literacy class as @hedgehog suggested) :

In Nov '09, 1 EUR buys $1.50. Let’s say you buy 100 units of a EUR exchanged, USD based fund @ 1 EUR, and 100 units of a USD exchanged, USD based fund @ $1.50.

100 x 1 EUR = 100 EUR
100 x 1.50 USD = 150 USD

Let’s say then over the next few years, the underlying shares double in value (assume no FX swings).

100 x 2 EUR = 200 EUR
100 x 3 USD = 300 USD = 200 EUR

Then, factor in a 20% decrease in the value of EUR against the USD. Your holdings in your home currency are worth:

100 x 2 EUR = 200 EUR
100 x 3 USD = 300 USD = 250 EUR

Last thing, it is not just me making some theories, this is so known that Portfolio Managers include currency hedging to their strategy to reduce or eliminate the fund’s exposure to the movement of foreign currencies. This is typically achieved by buying a product that will move in the “opposite” direction of the currencies that the fund holds. For more info (and I would highly suggest you both look it up) you can check here: https://www.investopedia.com/articles/investing/070815/how-currencyhedged-etfs-work.asp

Just as a side note: Please stop with this “What you are buying are earnings, not a piece of paper”, it really doesn’t make you sound more knowledgeable. It just shows that you watched some YouTube videos … Probably called “easy way to become a millionaire by investing in stock market” :sweat_smile:


#6

FYI, Hedgehog has a very good reputation in this forum, so no need to educate him :smiley:

But back to your question:

  • VOO is only listed in USD
  • VUSA/VUSD is listed in USD, GBP, EUR & CHF on 5 different stock exchanges
  • When you trade VUSA on these exchanges, you buy/sell units of the same ETF
  • So the currency is different, but in the end when you buy 100 shares of VUSA, you will agree that they are all worth the same, no matter in which currency you bought them, agree?

No, absolutely not. This adjustment is instant! Otherwise you could abuse it. Imagine you hold VUSA in CHF and you find out that VUSD in USD is cheaper at the current exchange rate. Then you quickly sell your ETF to get CHF back, buy some USD and then buy VUSD for USD. If there was any difference, then you would have made some money on that trade.

These links that you’re referring to, which mention hedging, that’s something different. Say you would like to buy US 10Y treasury notes with an interest of 3% per year in USD. But you track your returns in CHF. So these 3% could be +13% or -7%, depending on the exchange rate. That’s why you can protect yourself against currency fluctuations and fix your return. But it doesn’t come for free. For ETFs, in the long run, we have agreed here that it just doesn’t make sense to hedge.

So since both VOO and VUSA are unhedged, it really doesn’t matter in which currency they are traded, it matters that they are tracking the same thing.


#7

Hey! Thanks for your answer! Finally back to the topic!

Maybe educated on Stocks but should read again the Forum Guideline, my answer was a reaction to his comment:

Back to your answer:

Agree, but I am not talking about when you buy them. I am talking about the return. Go check the returns of VOO compared to VUSA all in dollar. You will find quite a big difference. I know they have different TER (0.5 for VOO against 0.7 for VUSA) but that doesn’t justify the big gap in performance. You can check more about this, it is a frequent topic in multiple forums.

Performance of the 2 ETFs:

https://americas.vanguard.com/institutional/mvc/detail/etf/overview?portId=9503&assetCode=EQUITY##performance

https://investor.vanguard.com/etf/profile/performance/voo

You track your performance either in USD or CHF and not in both so you need to convert either VOO and make it all in CHF or convert VUSA to USD and make it all in USD to be able to compare. And that is when you get the impact of FX.

I partially agree with you that you don’t need to hedge ETFs. I would say it depends on the ETF, for example an equity market is volatile, so adding the volatility of the currency exchange wouldn’t matter for a long term investment … However if you invest in fixed income market which is much more stable, you add an unnecessary volatility. It becomes like you are tracking the currency rather than tracking the fixed income market …

Last thing (even though I think this is a side topic and it clearly didn’t help explaining as I expected), here is a simple explanation of Currency Hedged ETF: https://www.youtube.com/watch?v=3q6ttf582dY


#8
  1. Their TER is 0.04% vs 0.07%, not what you write
  2. In the links you provide, the 5y CAGR of VOO is 8.45% and VUSD is 8.18%, so 0.27%. This difference is easy to explain, and it’s indeed not about the TER. S&P 500 produces 2% of dividend every year, and VUSA has to pay 15% withholding tax on this 2%, that 0.30%. VOO does not have to do it. Anyway, if you could find a total return chart for both VOO and VUSD (that’s not easy), then you would find no FX fluctuation. One curve would be almost identical to the other, just slowly diverging over time due to bleeding out wtax on dividends.
  3. That’s quite patronizing, telling me to read up on “multiple forums”…

I disagree. The price of VUSA in CHF has already the CHF.USD FX factored in, so when you convert the currency, you do a double FX, so it all cancels out. Why is that so hard to get? If you own a piece of VOO or VUSA, you own a fixed share of the US stock market. So it can’t matter which currency you buy and sell it.

Yes, I meant to say that hedging is not a good idea for ETFs from the equity asset class. Fixed income is a different story.


#9

Ok, you want to talk about manners on the forum?

  1. You did not present yourself. I do not even know how you could have missed this thread because it is the biggest on the forum.

  2. In your very first post, you manage to flood the forum with a question that has already been answered here, here, here, and here, as well as here. And, oh, did I mention here? So clearly you did not take time to do a forum search before asking. You will note that Hedgehog always take the time to answer the same questions. Maybe he was just a little bit tired of people like you profiting from his time. And by the way, your quoting of him is accurate, this question pops up so often it starts getting annoying.

  3. Hedgehog’s writings might be colorful, but at least he never called anyone an “A** h***” on the forum. You managed to do that in your second post.

  4. Hedgehog is easily in the top 3 of knowledge contributors on the forum, both in term of usefulness and accuracy. Your links on justETF and investopedia are surely correct, but they are irrelevant at best (and I will explain why below), and confusing at worst (because they make people focus on the wrong things).

  5. You managed to perform 4. “for education sake”. Danke vielmal, Herr Professor.

  6. When people try to tell you that instead of the quotation currency, you should focus on earnings and how they are measured, you belittle your interlocutor by insinuating that their little knowledge comes from scam videos on youtube.

All of this in your first three messages.
You won’t be surprised by the cold reception.

Now back to the topic, once and for all. Let’s take your example with the USD fund that went from 150 USD to 300 USD, and the fluctuations of USD vs EUR.
First, let me say that the only case where your example matters is for bonds and financial derivatives because they are financial contracts with predetermined and agreed cash flows. Stocks, on the other hand, are ownership claims on the future earnings of a business, and I will focus on them since it is the main topic of this forum.

You focus on the price of the fund going from 150 USD to 300 USD (i.e, the price of the piece of paper), without asking why it evolved this way.

  1. Maybe earnings doubled and USD remained stable, and in this case you are indeed twice richer, notwithstanding the currency in which your wealth is expressed.
  2. Maybe earnings stayed stable and USD lost twice its value, and in this case the business is mediocre, and you don’t deserve to be richer, whatever the currency.
  3. More probably it is a mix of 1. and 2.

For me asking which quotation currency is better is like asking if it is more relevant to measure my height in inches or centimeters. Heck, we could even create complicated measure systems which would change everyday like currencies ( one day 1 inch = 2.54 cm, then afterward 1 inch = 3.18 cm, then 1.76 cm, you get the idea), but at the end of the day, i would still be tall the same.

For stocks, it is the same: you own a business, and it does not matter if you measure its performance in USD, EUR or seashells, at the end of the day it is the business performance that matters, not the currency of the stock exchange it is listed on.


#10

Yes, that is clearly a mistake, a zero is missing in both numbers

I was almost convinced as so far this is the best a got after all, however how do you explain the difference in the 1-yr performance? I already said in the long term market fluctuation and the currency fluctuation average each other. If what you are saying is right, how can you have bigger difference after 1 year than after 5? Shouldn’t it go up since it’s compound?

Absolutely not, I reference to the other forums is just to say that if this problem is so trivial and so basic why people are still discussing it? Nothing more or less.


#11

In currency hedged ETFs currency is directly one of your underlying investments, FX forward contracts in particular is what you’re getting into in addition to stock. In pure stock funds it isn’t. Or at least only indirectly via companies’s sales/income exposure, which is quite diversified for large international companies. For example, about half the sales of S&P 500 is from abroad and it’s not something that hedged ETFs consider, these indices by construction only hedge stock price currency which is a half assed approach in this case. A small/micro cap in a random third world country of course likely would have almost all its sales local and so then hedging its stock price quoted in same local currency would make sense, but these should probably be only a small part of your portfolio


#12

I don’t know. One idea I have could be, that there are different trading hours for Europe and USA. So the closing price in Europe will not be the same as in USA, because USA closes 6 hours later. If you compare 31.12.2018 vs 31.12.2017, you could get different prices for both dates and the whole comparison would be inaccurate. This effect gets reduced over 5 years. As a proof that the only difference between VOO and VUSD is in the dividends, here a price chart from Financial Times. As you can see, they are almost identical. However, I couldn’t find and total return comparison, that would have dividends factored in.


#13

Sounds good :slightly_smiling_face:

Does this allow someone to say “this q pops up so often enough that it’s annoying, maybe it should be in FAQ or school curriculums or something if they even teach financial literacy in school these days”
If it annoys you don’t read it … Can’t be more complicated

“Profiting from his time”? are you kidding me? He can just skip answering me or just answer politely, how hard that can be?

Are you a moderator here or what? because you are being seriously subjective and loosing your credibility with other users! What do you mean by “colourful”? You can consider AH* a bit more colourful then! It all goes back to manners, colourful manners …

Being top 3 contributor doesn’t give an entitlement to omit using basic manners. And on your answer to me that opened a conversation that we are “trying” to discuss, right? You can say it is confusing but I can also say since my question instead of getting answers I am getting an army of minions trying to defend a dude that is “knowledgeable and top contributor” but “has colourful answers”

Now here are you being subjective again. Just compare “for education sake” to “this q pops up so often enough that it’s annoying, maybe it should be in FAQ or school curriculums or something if they even teach financial literacy in school these days”. Tell me how “for education sake” sounds worse? I didn’t see you getting excited like now that with his answer?

Well, by telling me that I consider EFT as a piece of paper moved around, you are also avoiding answering a clear tangible question by hinting that I am lacking basics. What you said can be found in the introduction of any investment book or any video about investment on Youtube. So Danke vielmal, Herr Professor.


#14

Thanks! That is informative, maybe you can try to ship in the discussion I am having with @Bojack. Basically my question is, where there is a difference in the return of VOO and VUSA? As you can see int he following links:

https://americas.vanguard.com/institutional/mvc/detail/etf/overview?portId=9503&assetCode=EQUITY##performance

https://investor.vanguard.com/etf/profile/performance/voo


#15

Interesting … I didn’t think about that, I will check

Same here tried to find something more granular comparing the 2, but I didn’t succeed.

In the end, why is it still a topic what people should do after DEGIRO removed VOO if you are all convinced that VUSA is exactly the same thing?


#16

There are unfortunately some differences (also covered on this forum):

  • VUSA is domiciled in Ireland, it hold shares domiciled in US, so it has to pay the dividend tax of 15%. If you own US stocks/ETFs directly in Switzerland, you can reclaim this tax in your tax declaration
  • trading costs on US stock exchanges are negligible compared to Europe
  • bid-ask spreads are lower in USA than in Europe, AUM of ETFs is higher, liquidity is higher

#17

So let’s go straight to the facts:

  1. I gave you 6 reasons why people may have judged that your first messages were annoying.You did not even acknowledge one of them and did not reconsider your behavior. Not even once.
  2. It seems outlandish to you that people start getting annoyed when you are asking a question that has been asked already a dozen times. You don’t even have the benefit of doubt, because the forum statistics tell me exactly how many topics and posts you did read (hint: very few, to say the least).
  3. This is a forum and as extraordinary as it seems, people take time to answer other member’s question. So yes, asking again and again the same things without doing a basic search can be seen as profiting from other’s time. But you seem to be totally oblivious of it, even when strongly hinted by moderation.

Seriously? Again an example where the question has been answered a dozen times. Do you even know what is the search function? Or are you going to be surprised because people get annoyed again by the same questions?

Yes, like it or not. You ask a lot of questions but you don’t want to do a lot of efforts.

Until now i’d never thought that I would have to use moderation on users, but I am sad to say I was wrong.

You’ll take two weeks of vacations, so you can actually read the forum and see what members have contributed so far.


#18
  1. VUSD and VUSA are the same shares of the same vanguard fund, just quoted in two different currencies on the exchange. Not even different share classes, they’re the exact same piece of paper, that you can choose to pay for in either dollars or pounds. You can check the ISIN number

  2. Let’s take the VUSD ticker quoted in USD for simplicity of comparison with its american counterpart VOO. Take a look at these bloomberg pages and spot the most important difference between them relevant to the return. (Hint: it’s not the expense ratio)

https://www.bloomberg.com/quote/VUSD:LN
https://www.bloomberg.com/quote/VOO:US