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Old 24.04.2016, 12:41
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How to reduce the currency risks on ETFs?

Hoi zme,

I am building a portfolio to invest my savings for my retirement but I have a problem. My problem is that by the time I retire I will probably go to live to the Eurozone (where I come from) or I might retire in Switzerland (although there is a loooong way to go and I might be actually dead by then). Anyway, I think that my expenses will be mostly in EUR or CHF or a combination of both, as they are at the moment.

Now, for any typical investment portfolio, the exposure to USD is huuuuge. Maybe 60% of the equities from S&P 500, part of the corporate and government bond coming from US as well and even REITs and commodities ETFs are denominated in USD.

I understand that for a regular American investor, having 60% of the portfolio in USD and the rest in a combination of different currencies is OK but, from an European perspective, having only 25% in EUR/CHF and 60% in a single foreign currency is something that would not let me sleep in the nights. A sudden (or not sudden, but continuous during the next 35 years) drop of 30% in the USD and I lose 18% of my future wealth, just like that.

I know there are currency hedged ETFs but I think that the hedge lasts only for a month, so it is useless in this case. Dedicating a larger part of my portfolio to the Swiss stock market would mean dedicating it to mainly 3 companies, from the same sector, something not really diversified. I could also have a million ETFs but I prefer to keep it simple to reduce the trading costs.

How do you Europeans investing in ETFs cope with this problem?
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Old 24.04.2016, 13:12
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Re: How to reduce the currency risks on ETFs?

Simple but basic rule: dont put all your eggs in one basket.
Unfortunately or fortunately the world is dollar based, which may or may not change in the future. Personnally, for various reasons, I dont like ETFs. Also dont like funds of funds.
Question is, if your planning to retire do you really want to invest in the markets?

As an alternative you may want to consider these posibilities:
http://www.responsability.com/invest...t-overview.htm
http://www.oikocredit.ch/de/
Both possibilities allow you to invest in EUR. The first one I have no personal expereince, However at Oikocredit I have a few Euros invested and get about 2% each year. Nothing fantastic but also not bad in comparison to just sticking it on some savings account. And it does go to a good cause.
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Old 24.04.2016, 13:32
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Re: How to reduce the currency risks on ETFs?

Your options are simple:

Take the risk
Hedge the currency risk (too expensive)
Avoid the risk

Ruling out the first two, then just buy EUR and CHF assets and investments.

You can hedge your underlying future needs by buying property in your country.
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Old 24.04.2016, 13:49
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Re: How to reduce the currency risks on ETFs?

Generally people don't understand currency risk of investments. If we take Nestle one might think that you were buying a CHF investment without currency. As only 2% of profits come from Switzerland the strength of the Indian rupee has a greater effect than the CHF. If the CHF is weak the share price will be higher, if the CHF is strong the share price will be lower.

As most of the companies in the S&P 500 index do business in other countries USA the same principle applies.

The real currency risk is investors investing in their local currency, as the currency strengthens their investments may fall in value in local currency terms.
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Old 24.04.2016, 14:16
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Re: How to reduce the currency risks on ETFs?

Have you looked closely at ETFs? There are currency hedged ETFs/Fund Classes, and they roll their hedges on a regular basis, not just in the first month. Read the fine print and it may be clearer, you are not the first guy with this issue.
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Old 24.04.2016, 14:19
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Re: How to reduce the currency risks on ETFs?

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Have you looked closely at ETFs? There are currency hedged ETFs/Fund Classes, and they roll their hedges on a regular basis, not just in the first month. Read the fine print and it may be clearer, you are not the first guy with this issue.
I'll check that out, thanks!
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Old 24.04.2016, 14:41
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Re: How to reduce the currency risks on ETFs?

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I dont like ETFs. Also dont like funds of funds.
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As an alternative you may want to consider these posibilities:
http://www.responsability.com/invest...t-overview.htm
http://www.oikocredit.ch/de/
Both possibilities allow you to invest in EUR.
And why exactly is moving a way from low TER funds to funds with a high TER of 2.5 - 3.5%, a good idea in your opinion?
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Old 24.04.2016, 14:54
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Re: How to reduce the currency risks on ETFs?

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Generally people don't understand currency risk of investments. If we take Nestle one might think that you were buying a CHF investment without currency. As only 2% of profits come from Switzerland the strength of the Indian rupee has a greater effect than the CHF. If the CHF is weak the share price will be higher, if the CHF is strong the share price will be lower.

As most of the companies in the S&P 500 index do business in other countries USA the same principle applies.

The real currency risk is investors investing in their local currency, as the currency strengthens their investments may fall in value in local currency terms.
That's a good point, but if the S&P 500 have an annual return of, let's say, 9%, this is not going to change dramatically because of the variations in the USDCHF exchange rate, since the volume of businesses of the American companies in Switzerland is not very representative. Therefore, the USDCHF variation will have little impact in the returns of the companies but a bigger impact in the money received by a Swiss investor.

In any case, I did some numbers today: I will retire in about 33 years hopefully and I checked how much the USD depreciated vs the CHF in the last 33 years. The USD lost around half its value (http://fxtop.com/en/historical-excha...en&CJ=0&MM1Y=0). Therefore, with compounded returns of 9% (this is only an assumption) in the S&P 500 in 33 years, if now I invest 1CHF (=1USD for the sake of simplicity), I would get 17USD in 33 years, only 8.5CHF if a similar depreciation of the USD is produced, i.e., an equivalent net annual return of 6.7% instead of 9% (which is not that bad anyway, especially considering that the inflation rate in the US is usually about 1%+ higher than in CH).

The same analysis with USD/DEM (USD/EUR now), give us a depreciation of the USD of 25-30% and an equivalent net annual return of 8%, having Germany also lower inflation rates than US, so OK also.

The DEM/CHF chart shows a depreciation of the DEM of around 30% (0.8% per year).

In any case, returns in the past don't imply returns in the future!
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Old 24.04.2016, 15:01
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Re: How to reduce the currency risks on ETFs?

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Now, for any typical investment portfolio, the exposure to USD is huuuuge. Maybe 60% of the equities from S&P 500, part of the corporate and government bond coming from US as well and even REITs and commodities ETFs are denominated in USD.
A typical US portfolio yes, but not a European one! By all means use US centric investment material for learning purposes, but recognise that you need to adapted it for Europe. Rather than the DOW think of the STOXX 50, rather than the S&P 500 look at say the MSCI Europe and so on.

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Dedicating a larger part of my portfolio to the Swiss stock market would mean dedicating it to mainly 3 companies, from the same sector, something not really diversified.
How so? For many Swiss citizens the SMI is their main holding and given the size and diversification there in, it has worked out fairly well for them over the past 30+ years.

As regard FX risk, trying to currency hedge of a 30+ year period is going to be very expensive. In stead try to hedge only the portion you expect to draw down in say the next 12 months or so.
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Old 24.04.2016, 15:10
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Re: How to reduce the currency risks on ETFs?

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A typical US portfolio yes, but not a European one! By all means use US centric investment material for learning purposes, but recognise that you need to adapted it for Europe. Rather than the DOW think of the STOXX 50, rather than the S&P 500 look at say the MSCI Europe and so on.



How so? For many Swiss citizens the SMI is their main holding and given the size and diversification there in, it has worked out fairly well for them over the past 30+ years.

As regard FX risk, trying to currency hedge of a 30+ year period is going to be very expensive. In stead try to hedge only the portion you expect to draw down in say the next 12 months or so.
You never looked at the SMI... Very little diversification at all

Novartis 23.03%
Nestle 22.05%
Roche 16.71%

3 stocks exceed 60% of the index & 2 pharma stocks roughly 40%. Whilst those 3 stocks have done well over 30 years not sure it's amy index for risk averse to track.
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Old 24.04.2016, 22:30
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Re: How to reduce the currency risks on ETFs?

The currency of your portfolio doesn't really reflect your currency risk. I can invest in nyse in an ADR from Asia or Latin America and the currency risk will probably be related to their market currency.

Just make sure the companies you have in your portfolio are not dependent in one market only.

Some people are actually against hedging since it will kill any potential good investment.
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Old 25.04.2016, 11:41
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Re: How to reduce the currency risks on ETFs?

If you want international exposure, buying swiss companies may actually be a good choice:
Most of them get a significant portion (some more than half) of their revenues from abroad; at the same time currency risk thereof is managed by professionals, aka the respective CFO, which you don't need to pay for additionally as you would have to with a currency-hedged ETF. Plus, individual hedging costs often are reduced to begin with because any company will try to implement "natural hedges", that is it will try to roughly balance cost and revenue in a given region or currency so that currency gains and losses largely cancel each other out.

I'm not sure if long-term shifts in exchange rates should be much of a concern: Higher inflation should at least in theory be compensated for by higher interest rate for bonds and higher nominal growth for stocks. I think a country's or a region's growth is more important.

The longer your time horizon the more you should consider fund/ETF fees, currency losses are likely to pale in comparison to those. For instance if you had a fund with 2% annual cost that would roughly halve your final value over a 33year holding period - Ouch!!! 1% annual fee still results in about 28% reduction of the final value. In my mind Vanguard should be your default fund and ETF company, not least because that avoids having to exchange currency if you adjust positions (see below).

You may want to take a look at the "Permanent Portfolio". The idea of using fixed portions for the asset classes and adjusting once a year inherently results in buying low(er) and selling high(er), including gaining from currency fluctuations. At the same time adjusting only once a year makes sure transaction costs stay low provided you use a low cost bank/broker.
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Old 25.04.2016, 12:05
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Re: How to reduce the currency risks on ETFs?

Worth bearing in mind that, for most people in their early to mid careers, the largest asset they have is not their house or savings, but the net present value of their future income.

So, if you are paid in CHF and anticipate your future liabilities to be in CHF, you may well be best served by having a majority of your savings denominated in USD, say.
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Old 25.04.2016, 12:46
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Re: How to reduce the currency risks on ETFs?

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Worth bearing in mind that, for most people in their early to mid careers, the largest asset they have is not their house or savings, but the net present value of their future income.

So, if you are paid in CHF and anticipate your future liabilities to be in CHF, you may well be best served by having a majority of your savings denominated in USD, say.
I was actually thinking on that, but part of my future salary will be used to further invest on my portfolio. In any case, it is true that, if I live in Switzerland for many many years (which is uncertain since I moved here 19 months ago), my pension will be already in CHF. What I do not know is what kind of investments are being done in my 2nd Pillar.

But, yes, it is a good point and I should actually look at investments underlying on EUR as well maybe.
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Old 25.04.2016, 12:53
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Re: How to reduce the currency risks on ETFs?

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If you want international exposure, buying swiss companies may actually be a good choice:
Most of them get a significant portion (some more than half) of their revenues from abroad; at the same time currency risk thereof is managed by professionals, aka the respective CFO, which you don't need to pay for additionally as you would have to with a currency-hedged ETF. Plus, individual hedging costs often are reduced to begin with because any company will try to implement "natural hedges", that is it will try to roughly balance cost and revenue in a given region or currency so that currency gains and losses largely cancel each other out.

I'm not sure if long-term shifts in exchange rates should be much of a concern: Higher inflation should at least in theory be compensated for by higher interest rate for bonds and higher nominal growth for stocks. I think a country's or a region's growth is more important.

The longer your time horizon the more you should consider fund/ETF fees, currency losses are likely to pale in comparison to those. For instance if you had a fund with 2% annual cost that would roughly halve your final value over a 33year holding period - Ouch!!! 1% annual fee still results in about 28% reduction of the final value. In my mind Vanguard should be your default fund and ETF company, not least because that avoids having to exchange currency if you adjust positions (see below).

You may want to take a look at the "Permanent Portfolio". The idea of using fixed portions for the asset classes and adjusting once a year inherently results in buying low(er) and selling high(er), including gaining from currency fluctuations. At the same time adjusting only once a year makes sure transaction costs stay low provided you use a low cost bank/broker.
Thanks a lot for your reply! I took a look at the Permanent Portfolio, but 25% in Gold is pretty heavy for me. I also like the Gone-Fishing Portfolio, but it has many ETFs and, considering the CHF9 that Swissquote will charge for transaction, it would be would to try to simplify it a bit.

Regarding Vanguard, I was mainly looking at their ETFs, but I have noticed that the dividends are distributed rather than accumulated (worse for transaction fees and tax implications as far as I know), so I am looking at iShares as well now. What do you think?
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Old 25.04.2016, 12:56
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Re: How to reduce the currency risks on ETFs?

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You never looked at the SMI... Very little diversification at all

Novartis 23.03%
Nestle 22.05%
Roche 16.71%

3 stocks exceed 60% of the index & 2 pharma stocks roughly 40%. Whilst those 3 stocks have done well over 30 years not sure it's amy index for risk averse to track.


Fun fact on the side: 33,3% of all Roche shares are owned by Novartis.
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Old 25.04.2016, 13:49
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Re: How to reduce the currency risks on ETFs?

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Fun fact on the side: 33,3% of all Roche shares are owned by Novartis.
maybe not for long http://www.reuters.com/article/us-no...-idUSKCN0XL0LK
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Old 25.04.2016, 14:50
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Re: How to reduce the currency risks on ETFs?

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Fun fact on the side: 33,3% of all Roche voting shares are owned by Novartis.
Clarification recommended. Most retail investors probably aren't aware that majority (more than 81% IIRC) are non-voting shares.

The voting bearer shares come with nominal value and right to vote at the AGM, whereby the latter has little value as the Roche family heirs hold 45% of the votes, whereas the Genusscheine have neither.

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Regarding Vanguard, I was mainly looking at their ETFs, but I have noticed that the dividends are distributed rather than accumulated (worse for transaction fees and tax implications as far as I know), so I am looking at iShares as well now. What do you think?
I'd be surprised if they didn't offer the option to have distributions automatically re-invested. You may want to check for the option to open an account with Vanguard themselves.

With that said, IIRC US securities come with one big caveat:
I seem to remember that your heirs have to pay inheritance tax according to US tax laws on any and all US securities you hold at the time of your death. Don't hang me up on this, verify with your tax advisor.

Last edited by Urs Max; 25.04.2016 at 15:01.
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Old 25.04.2016, 16:45
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Re: How to reduce the currency risks on ETFs?

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And why exactly is moving a way from low TER funds to funds with a high TER of 2.5 - 3.5%, a good idea in your opinion?
This might sum it up somewhat: http://www.frontierim.com/files/file/download/id/592

Basically, even TERs have hidden operating costs and naturally funds of funds. There's just more intermediaries taking a slice of the cake.
Also, I assume that the idea is to maintain a basis for retirement. Therefore, one shouldn't invest in any product that will fluctuate at the whims of the markets. The examples I provided were just suggestions of how one might keep their assets in the EUR with out risking it on the stock market. At the same time not watching it depreciate in some savings account.
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Old 25.04.2016, 17:04
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Re: How to reduce the currency risks on ETFs?

Would be interesting, but the Roche family members will presumably die eventually and allow for a future merger.
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