ETFs and exchange rate question
Discussion
Hesitate to ask this question, as I suspect the answer will be obvious, but I'm looking for confirmation if possible.
Let's say I have a global tracker (ETF) and I invested a certain amount of money in GBP. Let's say dividends etc are reinvested. After a period of time, the ETF will have a certain value in pounds. I then sell the ETF to realise the final value.
Alternatively, let's say I take that original amount of money, converted it to USD and invested it into a USD denominated ETF which has the same regional weightings as the UK version. It runs for the same period of time with dividends reinvested etc. At the end of the given period, I sell the fund and convert the proceeds back to GBP.
Assuming the same expense ratio on both ETFs, and assuming no currency exchange fees at the start and the end, would the final amount of pounds be the same in both scenarios?
i.e. I'm not exposing myself to more exchange rate risk in either scenario?
Let's say I have a global tracker (ETF) and I invested a certain amount of money in GBP. Let's say dividends etc are reinvested. After a period of time, the ETF will have a certain value in pounds. I then sell the ETF to realise the final value.
Alternatively, let's say I take that original amount of money, converted it to USD and invested it into a USD denominated ETF which has the same regional weightings as the UK version. It runs for the same period of time with dividends reinvested etc. At the end of the given period, I sell the fund and convert the proceeds back to GBP.
Assuming the same expense ratio on both ETFs, and assuming no currency exchange fees at the start and the end, would the final amount of pounds be the same in both scenarios?
i.e. I'm not exposing myself to more exchange rate risk in either scenario?
Assuming the ETF is not hedged your assumption is almost correct. You will lose twice from the fx spread in the second scenario however and this loss will be much greater than any fees or expenses. So the fx risk will be the same but the final amount of GBP will be reduced by the spread.
Fwiw, I prefer to buy or sell USD denominated assets out of USD accounts and convert to GBP as and when the rate suits. Pain the the arse to find institutions who have the proper licenses nowadays but Citibank and Barclays are the best to talk to ime.
Fwiw, I prefer to buy or sell USD denominated assets out of USD accounts and convert to GBP as and when the rate suits. Pain the the arse to find institutions who have the proper licenses nowadays but Citibank and Barclays are the best to talk to ime.
Edited by Kirkmoly on Friday 20th January 20:58
When you say 'the spread' you are referring to the cost of converting it initially into USD (before investing) and then back again?
The strange thing is, I initially tried to "test" it by looking for two "identical" ETFs (something like SPY), finding the interbank GBP/USD exchange rate say 10 years ago, and then seeing if they lined up - except they were still a few percent different (before taking into account any currency exchange fees)
The strange thing is, I initially tried to "test" it by looking for two "identical" ETFs (something like SPY), finding the interbank GBP/USD exchange rate say 10 years ago, and then seeing if they lined up - except they were still a few percent different (before taking into account any currency exchange fees)
EddieSteadyGo said:
When you say 'the spread' you are referring to the cost of converting it initially into USD (before investing) and then back again?
The strange thing is, I initially tried to "test" it by looking for two "identical" ETFs (something like SPY), finding the interbank GBP/USD exchange rate say 10 years ago, and then seeing if they lined up - except they were still a few percent different (before taking into account exchange fees)
I mean the exchange rate buy/sell difference. This is a good indication of what you’ll get as a retail investor The strange thing is, I initially tried to "test" it by looking for two "identical" ETFs (something like SPY), finding the interbank GBP/USD exchange rate say 10 years ago, and then seeing if they lined up - except they were still a few percent different (before taking into account exchange fees)
https://www.natwest.com/global/commercial-currency...
In general there should be no difference, assuming the funds aren't currency hedged.
However everything else is not equal.
The rates you get from converting GBP to USD and back again will be different to the one the fund manager gets due to timing differences and better spreads the fund manager can get from their bank.
Not all ETFs are the same even if they track the same index. You need to compare two different currency classes of the same fund for it to be closer.
In other words, I'm not aware of any reason why you would choose to convert GBP to USD to buy a USD fund if that fund was also priced in GBP.
However everything else is not equal.
The rates you get from converting GBP to USD and back again will be different to the one the fund manager gets due to timing differences and better spreads the fund manager can get from their bank.
Not all ETFs are the same even if they track the same index. You need to compare two different currency classes of the same fund for it to be closer.
In other words, I'm not aware of any reason why you would choose to convert GBP to USD to buy a USD fund if that fund was also priced in GBP.
LeoSayer said:
....
In other words, I'm not aware of any reason why you would choose to convert GBP to USD to buy a USD fund if that fund was also priced in GBP.
I'm now trading quite a high volume of options, which for various technical reasons needs to via a US brokerage firm (rather than say IBKR). Up to now I'm using my "personal" account, but I'm thinking of also switching my pension over - and if I do that, I'll want to keep the main bulk of the money still invested in the same kind of index funds. And currently they are all GBP denominated funds whereas with the US broker it has to be USD. Hence the question.In other words, I'm not aware of any reason why you would choose to convert GBP to USD to buy a USD fund if that fund was also priced in GBP.
Kirkmoly said:
I mean the exchange rate buy/sell difference. This is a good indication of what you’ll get as a retail investor
https://www.natwest.com/global/commercial-currency...
Thanks, but TBH I would aim to do quite a bit better than that. Currently I'm using Wise, which compares favourably on the GBP/USD rate.https://www.natwest.com/global/commercial-currency...
I have only recently becime aware of the abbreviation ETF.
However, is it just a new name dreamt up for financial marketing reasons, then applied to the same product that has existed for decades ?
A simple investment fund, which many years ago was named Unit Trust.
There is a very funny film video about fancy names for financial products.
In this case quite hilarious, because the product for sale was utter rubbish, but made hugely more attractive and therefore valuable, by being given an extremely impressive sounding name.
( Start at 3:00 if you wish. )
Edited by Jon39 on Saturday 21st January 09:54
Fundamentally, the currency that the fund is priced in is irrelevant except for the convenience of not having to do the currency conversion yourself.
Regardless of the fund currency, your exposure is to the fluctuating values of the fund's underlying assets when converted back to your 'home' currency of GBP.
So for a typical global equity index fund, you're exposed largely to the fluctuating prices of the underlying assets in whatever currency they are priced in (eg. Apple, Microsoft, Alphabet etc which are priced in USD) along with other companies priced in EUR, GBP, CAD etc.
Howeverr, if you want to remove this currency exposure (back to GBP) via a hedged fund priced in USD then I think you're out of luck.
Regardless of the fund currency, your exposure is to the fluctuating values of the fund's underlying assets when converted back to your 'home' currency of GBP.
So for a typical global equity index fund, you're exposed largely to the fluctuating prices of the underlying assets in whatever currency they are priced in (eg. Apple, Microsoft, Alphabet etc which are priced in USD) along with other companies priced in EUR, GBP, CAD etc.
Howeverr, if you want to remove this currency exposure (back to GBP) via a hedged fund priced in USD then I think you're out of luck.
LeoSayer said:
Fundamentally, the currency that the fund is priced in is irrelevant except for the convenience of not having to do the currency conversion yourself.
...
Agreed....that's why I thought I might be asking a numpty question, but it's useful to get what I thought was right confirmed (before I risk larger amounts and realise I've made an oversight!)...
LeoSayer said:
Fundamentally, the currency that the fund is priced in is irrelevant except for the convenience of not having to do the currency conversion yourself.
Regardless of the fund currency, your exposure is to the fluctuating values of the fund's underlying assets when converted back to your 'home' currency of GBP.
So for a typical global equity index fund, you're exposed largely to the fluctuating prices of the underlying assets in whatever currency they are priced in (eg. Apple, Microsoft, Alphabet etc which are priced in USD) along with other companies priced in EUR, GBP, CAD etc.
However, if you want to remove this currency exposure (back to GBP) via a hedged fund priced in USD then I think you're out of luck.
Regardless of the fund currency, your exposure is to the fluctuating values of the fund's underlying assets when converted back to your 'home' currency of GBP.
So for a typical global equity index fund, you're exposed largely to the fluctuating prices of the underlying assets in whatever currency they are priced in (eg. Apple, Microsoft, Alphabet etc which are priced in USD) along with other companies priced in EUR, GBP, CAD etc.
However, if you want to remove this currency exposure (back to GBP) via a hedged fund priced in USD then I think you're out of luck.
Quizzical look.
Are you George Parr's script writer ?
Jon39 said:
I have only recently becime aware of the abbreviation ETF.
However, is it just a new name dreamt up for financial marketing reasons, then applied to the same product that has existed for decades ?
A simple investment fund, which many years ago was named Unit Trust.
They can be traded intra-day so you know exactly the price you will get unlike unit trusts which generally operate on forward pricing which means you don't find out the price until 1-2 days later.
They can be traded like an equity which means that you might pay lower transaction fees on certain platforms.
LeoSayer said:
ETFs are a slightly different product to a unit trust (aka mutual funds / OEICS / UCITS / SICAVs etc).
They can be traded intra-day so you know exactly the price you will get unlike unit trusts which generally operate on forward pricing which means you don't find out the price until 1-2 days later.
They can be traded like an equity which means that you might pay lower transaction fees on certain platforms.
They can be traded intra-day so you know exactly the price you will get unlike unit trusts which generally operate on forward pricing which means you don't find out the price until 1-2 days later.
They can be traded like an equity which means that you might pay lower transaction fees on certain platforms.
Thank you Leo.
I now feel my investment strategy is rather unadventurous and simplistic.
No ETFs / OEICS / UCITS / SICAVs etc.
I just selected large UK businesses that trade around the world (geographical and currency diversification), then laid out money to obtain a larger flow of money back. Business results and compounding did all the work for me.
Seems to be a way that has worked quite well, but am I being rather mean, by not trading and therefore not giving my money to employees working in the financial industry ?
Fees to run all the investments last year, were only £42 ( and the government would have taken
£7 of that. )
Jon39 said:
Thank you Leo.
I now feel my investment strategy is rather unadventurous and simplistic.
No ETFs / OEICS / UCITS / SICAVs etc.
I just selected large UK businesses that trade around the world (geographical and currency diversification), then laid out money to obtain a larger flow of money back. Business results and compounding did all the work for me.
Seems to be a way that has worked quite well, but am I being rather mean, by not trading and therefore not giving my money to employees working in the financial industry ?
Fees to run all the investments last year, were only £42 ( and the government would have taken
£7 of that. )
You're clearly satisfied with your level of diversification with however many holdings you have and it has delivered returns that you are happy with, however I would not say that such an approach is unadventurous or simplistic.
My experience seems to be that for every investor (like you) that has success in such an approach, there are far more who have failed.
Individual company investment is something that I neither have the time, skill or desire to do so I'm happy to pay a % of my savings to FS companies for the service of getting exposure to 1000s of companies across the world. No doubt I have paid well north of £10k over the years for the privilege in the form of fund fees and platform fees.
There is of course huge complexity in the world of FS from the amount of products, services and regulations which makes it very hard to navigate for anyone other than professionals or the dedicated. But once you whittle it down to the need to get exposure to global stock market performance, it becomes somewhat easier.
LeoSayer said:
... My experience seems to be, that for every investor (like you) that has success in such an approach, there are far more who have failed. ...
Yes, unfortunately I expect you are right.
It is a subject that does needs to be taken seriously, putting in effort to learn as much as possible during the early stages. That probably does not appeal to many people.
Once the chosen strategy (long-term has proven best) if correctly monitored (and with luck) is seen to be going well, then the necessary work tails off to almost nothing. Just business reading and some minimal admin.
I was going to mention needing to possess the right temperament, but of course once anyone moves away from cash or cash equivalents, then they also require that same temperament, to cope with occasional tumbling values. Buying funds or shares during bubbles and selling during panics, does need some discipline.
A few of my friends have zero appetite for financial risk, so have always kept all their savings in building societies.
They are pleased not to have any volatility, but seem unaware that their money is continually losing value. They are just happy to see interest added in the passbook. How to calculate the effect of long-term inflation, is something they have probably never thought about.
Your mention of 'exposure to 1000s of companies', to me, is far more than is required. I expect you probably have some extremely successful businesses in those funds, but their significance would be so diluted, that taking some of those out, would not even make any difference to the overall performance.
Mr. Buffett has been hugely successful investing in just one company. I am not that brave and am running 26 at present. One extra company joined last year without any action by me, following a demerger.
It is interesting during each year, to see which companies move to the top of the league table. Something that has always been impossible to predict. I suppose it is a demonstration, that buying shares or funds for the short-term, is akin to gambling.
Edited by Jon39 on Saturday 21st January 14:41
Jon39 said:
Yes, unfortunately I expect you are right.
It is a subject that does needs to be taken seriously, putting in effort to learn as much as possible during the early stages. That probably does not appeal to many people.
Once the chosen strategy (long-term has proven best) if correctly monitored (and with luck) is seen to be going well, then the necessary work tails off to almost nothing. Just business reading and some minimal admin.
I was going to mention needing to possess the right temperament, but of course once anyone moves away from cash or cash equivalents, then they also require that same temperament, to cope with occasional tumbling values. Buying funds or shares during bubbles and selling during panics, does need some discipline.
A few of my friends have zero appetite for financial risk, so have always kept all their savings in building societies.
They are pleased not to have any volatility, but seem unaware that their money is continually losing value. They are just happy to see interest added in the passbook. How to calculate the effect of long-term inflation, is something they have probably never thought about.
Your mention of 'exposure to 1000s of companies', to me, is far more than is required. I expect you probably have some extremely successful businesses in those funds, but their significance would be so diluted, that taking some of those out, would not even make any difference to the overall performance.
Mr. Buffett has been hugely successful investing in just one company. I am not that brave and am running 26 at present. One extra company joined last year without any action by me, following a demerger.
It is interesting during each year, to see which companies move to the top of the league table. Something that has always been impossible to predict. I suppose it is a demonstration, that buying shares or funds for the short-term, is akin to gambling.
The paper linked below says:
"When stated in terms of lifetime dollar wealth creation to shareholders in aggregate, approximately one-third of 1% of the firms that issued common stocks contained in the CRSP database account for half of the net stock market gains, and slightly more than 4% of the firms account for all of the net stock market gains. The other 96% of firms that issued stock collectively matched one-month Treasury bill returns over their lifetimes."
https://papers.ssrn.com/sol3/papers.cfm?abstract_i...
Investment isn't a job or a hobby for me, it's essential to my family's future. I just don't fancy the odds of getting it right via individual stock selection when in the past I have been proved to have got it wrong via individual stock and active fund manager selection.
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