The market : "Hey guys, the CHF is as safe as gold, let’s buy it. It will go up and we will even have 1% on our savings account.
The SNB was then literraly forced to lower the interest rate.
No employed person in Switzerland is 100% invested in stocks.
Your (1st and) 2nd pillar is part of your net worth and “asset allocation”, and many consider it as the bond-like part of their portfolio.
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This is important, bonds should be hedged, otherwise they are more volatile and that is the opposite of what you want.
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Hi everyone
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?
I’d encourage you to actually play that scenario on paper, it’s not very complex and it’s a good exercise to grasp those things better.
Like just write what you hold at each time (ETF, GBP, USD), and compare various scenarios.
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LE NEST - 109 CHF
PB - 3 GBP
BANANA - 385 USD
You will have 250 shares of that ETF in GBP (250 * 400 GBP) and 250 shares of the equivalent ETF in USD (250 * 500 USD).
CASE 1) Let’s imagine GBP will be 1 CHF and 1 USD in 5 years. Stock price didn’t move. :
Your GBP ETF will have a value of 497 GBP (109+3+385). You convert it in CHF and you get 497 CHF.
Your USD ETF will have a value of 497 USD. You convert it in CHF and you get 497 CHF.
CASE 2) Let’s imagine GBP will be 0.5 CHF and 1.1 USD in 5 years. Stock price didn’t move. :
Your GBP ETF will have a value of 109/0.5 + 3 + 385/1.1 = 571 GBP. You convert it in CHF and you get 285.5 CHF.
Your USD ETF will have a value of 109 * 2.2+ 3 * 1.1 + 385 = 628.1 USD. You convert it in CHF and you get 285.5 CHF
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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.
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There is of course fluctuations, but let’s look at an example.
-
You put 1000 USD (=1000 CHF) on a us savings account at 1.5 % during 3 years. You end up with 1045.68 USD.
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You exchange your 1000 USD into 1000 CHF and you put them on a swiss savings account with 0.5% during 3 years. You end up with 1015.08 CHF.
In theory, the exchange rate after 3 years will be 0.9707 CHF for 1 USD.
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Hello - thank you for the very detailed reply!
Good explanation.
A good and detailed text on the topic, in german, is here:
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Now another example real this time.
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.
Why currency can be very dangerous.
Out of curiosity, if you use the benchmark rate for CHF (negative), would things be closer? (as small investors you have access to better = 0% rate, but a large institution wouldn’t).
Thank you for this detailed explanation
Juste remembered the higher price of GBP and now almost like EUR.
Even some EU people buy in GBP due to cheaper product price now 
I not know what happen exactly but can go up in short term too 
Probably introduced in 2008/2009 the negative interest rate at ~ -1% on 2k it’s about 240.- interest rate.
Currency hedging is expensive in the long term, that is clear. I am not in favour.
The key point to consider is when you have Cash, such as in brokers in a different currency than your home currency. That should be avoided, as it can be good… but in most cases with CHF it will be a disaster.
Hi, just to clarify - do you mean it will be a disaster if you live in Switzerland and hold cash in other currencies (in my case, GBP)?
Yes, but a disaster due to uncertainty. In general, strong currencies tends to get stronger than others, such as GBP. So you better save in CHF than in others. HOWEVER, you never know what can happen with GBP in the next 20 years, or with any FIAT currency in general.
The general recommendation is to hold cash in the currency you need it, otherwise, you are speculating with currencies and their future value.
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Especially, since 2008, the CHF is strong only because people think it’s strong. There are even so many people believing it, that ironically the Swiss National Bank is lead to weaken the CHF massively at each emergence of the crisis. Additionally, the newly created CHF’s are backed by “weak” currencies!..
I would disagree, since 2008 the CHF is strong because EU had a severe Euro crisis, and US took a while coming out of & recovering from its greatest depression in 80 years. CH also mostly has current account surplus with these trading partners and generally low debt in comparison.
That argument would be perfectly valid… if you’d set aside the efforts of the SNB to weaken the currency - that’s precisely what people forget when they sell their euros or their dollars. When you sell your euros, you don’t get necessarily francs that were circulating in the Swiss economy, you’ll likely get francs “printed under the desk”, basically Monopoly bills backed by the euros or dollars you thought and hoped you’d get rid of. The SNB draws to that purpose 4.3 Billion new francs from the magic hat each month on average since 2008.