Author Topic: Dollar vs Euro exchange rates in Index Funds  (Read 931 times)

DutchDividenD

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Dollar vs Euro exchange rates in Index Funds
« on: February 19, 2017, 05:22:21 AM »
Dear Mustachians,

I'm a Dutch resident who has been attacking my mortgage, and now it is time for some serious investing in index funds. Now I have a question on which I can't find the answer online so far. If I buy (American) index funds in dollars, do I also get influenced by the dollar-euro exchange rate? And if so, does this mean it's better to invest in index funds that are in euro's?

It seems to me the ever changing exchange rates add a lot of risk to the investment, which shouldn't ideally be there. If anyone could explain the implications of the exchange rates on investing in index funds to me, it would be great!

Thanks in advance for your answers!

AnswerIs42

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Re: Dollar vs Euro exchange rates in Index Funds
« Reply #1 on: February 19, 2017, 05:51:38 AM »
Most index funds are unhedged - so currency fluctuations do affect the valuations in your home currency.

I definitely see this as a good thing rather than a bad thing, because you are diversified as far as currencies are concerned and not tied to your home currency.

As a concrete example of how this is useful - I'm in the UK and have a diversified portfolio of index funds from across the world. When the Brexit vote happened, the value of the pound ended up sinking. Because my investments were in unhedged index funds, their value in GBP rose accordingly, as these Euro / USD / etc based shares ended up being worth more in GBP terms.

If I'd have been in currency-hedged funds, then I'd be "insulated" from any currency differences and the value in GBP wouldn't have changed much. However, I would have lost a fortune relative to any other currency.
« Last Edit: February 19, 2017, 05:53:38 AM by AnswerIs42 »

Spruit

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Re: Dollar vs Euro exchange rates in Index Funds
« Reply #2 on: February 19, 2017, 03:52:17 PM »
I recommend to read this blog by a fellow Dutchman that invests with dollars. He goes into some detail about the implications e.g. exchange rate etc.
http://www.trackerbelegger.nl/beleggen-dollars-valutarisico/

DutchDividenD

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Re: Dollar vs Euro exchange rates in Index Funds
« Reply #3 on: February 20, 2017, 12:46:12 AM »
I recommend to read this blog by a fellow Dutchman that invests with dollars. He goes into some detail about the implications e.g. exchange rate etc.
http://www.trackerbelegger.nl/beleggen-dollars-valutarisico/

Thanks guys, this answers my question perfectly! Both answers helped, but especially the link. Now it's time to start :)