Hoping to get some of the brains on this forum to give their thoughts on my situation. I am struggling to get my head round how best to mitigate currency risk, or if I should even be concerned about it.
I’m in my late 30s, originally from the UK and have been living in Switzerland for eight years. I’m settled here and have no plans to leave but equally could easily end up moving elsewhere in Europe in the next few years. I would say it’s at most a 50/50 chance that I will ever live in the UK again.
I recently sold a property I owned in the UK as it was becoming too difficult and expensive to maintain. I have the proceeds from the sale in GBP that I want to invest. I also have some savings in CHF, and some money already invested in funds, but having sold my property around 60% of my portfolio is now in GBP cash.
Having read a lot over the past few weeks, I’ve decided that I want to invest the majority in ETFs. I’ve set up an account on IB and have already converted some of my GBP into USD and bought into the VT fund, and also bought shares in the iShares Core FTSE 100 ETF (in GBP).
I am thinking that in order to minimize the risk of FX rate changes, my best approach is to a) convert the majority into USD and buy more VT shares b) leave some in GBP and invest that into UK ETFs or into a different world fund (eg. VWRL) and c) convert some into CHF and invest in a Swiss fund (eg. iShares Core SPI).
I’m not sure if that makes sense, or if I am overcomplicating it by thinking I need to invest in two world funds (one traded in USD and one in GBP) in order to spread the risk. I’m also struggling to figure out whether it’s a risk to convert the majority of the GBP into USD in order to invest more into the VT fund. I’ve read that the currency used to buy and sell the fund is less important than the underlying currencies in the fund. However there still seems to be a risk in having the majority invested in funds traded in USD dollar is very weak when I come to sell.
I’m also reluctant to convert GBP into CHF at the moment given how poor the exchange rate is, however I’ve read that I should invest in my ‘home currency’.
I think it is most likely that I will still be in Switzerland when I come to sell so would probably need convert back into CHF, however it could also be that I am living in the Eurozone or even in the UK.
Would love any thoughts on how best to manage the risk. I have read about currency hedged ETFs but I’m not sure if they make the most sense.
That would obvously help if you knew what you will do.
The first question is : What do you want to own (asset allocation) ? Your answer : mostly ETFs. Do you have any reasons not to buy the world ? In your case, no. So, convert your money in USD and buy VT.
The next question is : what about the rest of your money. You have CHF and GBP. I guess your salary is in CHF. What interest rates do you have on your accounts ? There is the concept called the parity of interest rate. If the market think a currency will go down, it will have a higher interest rate and a currency which the market think will go up will have a smaller interest rate.
In february 1971 the GBP was 10.41 CHF. In november 1977 it was 3.93 CHF. In december 1985, it was 3 CHF and so on. The exchange rate between the GBP and the CHF has “always” been the worst ever, just like the stock market hits “always” new records. Same with any currency. USD was 5.5 CHF in 1800 (I don’t know how they calculate it before 1848 but whatever). CHF was 0.8 french franc (80 old francs that became cents later.) and and now the CHF is 6 french franc (in euro).
Conclusion : you can in theory keep your money in any currency, over the long term you will end up with the same ammount, as long as you have the “market” interest rate, or even a better interest rate. People prefer their home currency because there is obviously fluctuations.
Currency risk is really a risk when you plan to invest in a more weaker currency because of their volatility range. But at the end every currencies with no exception will be close to zero. But this currency risk will kick in when you invest in something which might not be enough liquid - for example bonds. There you have to stay in the bond until it expire, and get your yearly return maybe in a currency which gets weaker 2-3% every year.
When you invest in global company and there are many in UK as well (or in VT), you mitigate this risk. And if you would feel this risk still valid, then buy some percentage of gold in your AA to hedge it for the future.
Thank you for all the replies - super helpful! I shall take time to read them carefully…
I must admit I’m still struggling with these parts: ‘the currency in which an ETF is listed is irrelevant’ and ‘you can in theory keep your money in any currency, over the long term you will end up with the same amount’
Let’s say someone in Switzerland has 200k GBP to invest on ETFs. They convert 100k GBP into USD and buy a world ETF traded in USD, and then they use the other 100k GBP to buy into the same ETF but traded in GBP. 5 years later, they sell all their shares and convert the USD and GBP into CHF. During those five years, the GBP has weakened against the CHF. Doesn’t this mean that they would get a better return from the ETF traded in USD than they would from the one traded in GBP, even though they invested exactly the same amount in both? And if that’s the case, then the currency in which the ETF is traded IS important?
You’re buying (shares of exactly) exact same thing.
Let’s assume that 1 share of yourETF has a market price of 100£ on London stock exchange today
Let’s also assume that 100£ = 120 CHF at today’s exchange rate
You’re having 100£ to invest as of today.
What would you expect today’s price for yourETF to be at the Swiss stock exchange as of today? Considering, that money can be exchanged and moved from Britain to Switzerland and from GBP to CHF and vice versa practically instantly and for free (and the fact, that yourETF is the same thing regardless of where you buy it)?
Say yourETF makes a distribution of 1£ today. What’s the amount you would be credited in CHF? 1.20 CHF at today’s exchange rate. Why should it be anything else?
This is always true: The relation between GBP and CHF prices for yourETF will at all times be determined by the GBP/CHF exchange rate.
If yourETF’s price would be 100£ in London and decrease to 100CHF in Zurich, given the same exchange rate of 100£=120 CHF, what would happen?
Big institutionals would flock to that arbitrage opportunity and (literally) drop billions of CHF on the table to buy as many shares as they can in Zurich (at 100 CHF a share) and simultaneously sell as much as they can at 120£ in London. Simple arbitrage. Free profit, free lunch.
Of course that doesn’t happen. There might be minuscule and/or temporary such price differences between the two markets and currencies - but they’ll be negligible to you as a long-time investor.
This is a theoretical statement. In practice, you can very well lose or gain on currency fluctuations, since central bank interest rates are often “artificially” set and do not necessarily reflect supply and demand.
Some year ago you have converted 2800 CHF to 1000GBP at 2.8 (exchange rate)
Now you retrieve your 1000GBP at ~1300 CHF due to the new exchange rate at 1.3.
Interest rate can’t compensate 1500 CHF lost.