Author Topic: Investing in ETFs in multiple currencies?  (Read 4891 times)

sparkshooter

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Investing in ETFs in multiple currencies?
« on: July 28, 2015, 05:36:29 PM »
Long time reader, first time poster.

My husband and I are US citizens and Canadian permanent residents. We live and work in Canada and intend to do so indefinitely (i.e.: we plan to retire here, although life is long and uncertain). We are both mid-20's. Before moving to Canada, we saved about $50k USD from jobs in the US. We now also have about $30k CAD. Currently, the entire $80K (mixed currencies) is invested in index ETFs/funds denominated in the relevant currency.

My question: if we plan to stay in Canada long-term/forever, should we convert our USD to CAD? Keeping/rebalancing USD and CAD investment accounts is a  major chore (once a year), and the wildly fluctuating exchange rate throws our asset balances off immensely even when the underlying index doesn't gain or lose. I feel like we are mainly investing in the exchange rate, rather than the underlying assets.

On the other hand, converting USD to CAD would have transaction costs (although there are ways to minimize this, like Norbert's Gambit). Diversification is good. We may move back to the US, and it would be silly to convert to CAD and then back to USD. I receive passive income (amazon e-book royalties) of about $2,000/year in USD (although maybe this could be switched to CAD - not sure.) In addition, both of our families live in the US and occasionally give us gifts in USD, which are put straight into our investment accounts. 

deborah

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Re: Investing in ETFs in multiple currencies?
« Reply #1 on: July 28, 2015, 05:54:00 PM »
Sounds like some very good reasons to keep both.

forummm

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Re: Investing in ETFs in multiple currencies?
« Reply #2 on: July 28, 2015, 05:59:38 PM »
As long as your investments are broadly diversified, I think it's OK if your USD or CAD gets bigger than the other one. They are both pretty stable currencies. You can leave them invested forever and then just draw down in retirement.

sparkshooter

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Re: Investing in ETFs in multiple currencies?
« Reply #3 on: July 28, 2015, 06:41:25 PM »
Over time, the CAD will presumably substantially outpace our USD savings. We make about $110k/year (recent development - I started a new job 3 weeks ago) and presuming limited lifestyle inflation, we'll be saving about $40k/year.

Since we do currently plan to leave everything invested "forever," I almost feel like that militates for converting to CAD now. My retirement expenses will almost certainly be in CAD and once I'm out of the workforce, I wouldn't want to have much of my stache subject to a volatile exchange rate. (For example, in the 3 years I've been in Canada, the rate has gone from .97 CAD/USD to 1.28 CAD/USD).

WerKater

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Re: Investing in ETFs in multiple currencies?
« Reply #4 on: July 29, 2015, 09:48:41 AM »
It does not matter in which currency an ETF is denominated, only what it invests in.
If you buy an ETF denominated in USD which invests only in the stock X, you are invested in A, not in USD.

Compare these cases:
In both cases, the ETF consists of exactly one share of X. This share is denominated in USD and is currently worth 1 USD. The exchange rate is 1.00 CAD/USD
(case a) The ETF is denominated in USD
(case b) It is denominated in CAD

Now the exchange rate changes to 2.00 CAD/USD. X retains its value of 1 USD.
In case (a), the ETF will now obviously still be worth 1 USD. You can sell it, get 1 USD and convert it to 2 CAD.
In case (b), the ETF could sell its share of X for 1 USD. It could then convert this 1 USD to exactly 2 CAD. Hence, the ETF is also worth 2 CAD.




sparkshooter

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Re: Investing in ETFs in multiple currencies?
« Reply #5 on: July 29, 2015, 05:36:26 PM »
It's true that it doesn't matter whether the ETF is denominated in USD or CAD...until it comes time for rebalancing. Then, the fact that the exchange rate has moved a bunch basically obscures the underlying movement of the ETF. So instead of selling "winners" and buying "losers," it all comes down to whether the ETF was bought with USD or CAD funds.

For example, imagine I had invested the following when the USD/CAD were close to par:

30% in USD in US stocks
20% in CAD in Canadian stocks
15% in USD in international stocks
20% in CAD in North American bonds

Based on the fact alone that that the exchange rate is now $1.30 CAD to the USD, my US stocks/North American bonds would be way off their asset allocation, even if the underlying indexes had stayed the same.



daverobev

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Re: Investing in ETFs in multiple currencies?
« Reply #6 on: July 29, 2015, 06:52:46 PM »
It's true that it doesn't matter whether the ETF is denominated in USD or CAD...until it comes time for rebalancing. Then, the fact that the exchange rate has moved a bunch basically obscures the underlying movement of the ETF. So instead of selling "winners" and buying "losers," it all comes down to whether the ETF was bought with USD or CAD funds.

For example, imagine I had invested the following when the USD/CAD were close to par:

30% in USD in US stocks
20% in CAD in Canadian stocks
15% in USD in international stocks
20% in CAD in North American bonds

Based on the fact alone that that the exchange rate is now $1.30 CAD to the USD, my US stocks/North American bonds would be way off their asset allocation, even if the underlying indexes had stayed the same.

Wat. Pick a currency for your asset alloc, probably the one where you expect to retire/draw down this money. Then work out your current holdings in that single currency.

Actually switching currencies makes no difference to this.

WerKater

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Re: Investing in ETFs in multiple currencies?
« Reply #7 on: July 29, 2015, 10:54:05 PM »
It's true that it doesn't matter whether the ETF is denominated in USD or CAD...until it comes time for rebalancing. Then, the fact that the exchange rate has moved a bunch basically obscures the underlying movement of the ETF. So instead of selling "winners" and buying "losers," it all comes down to whether the ETF was bought with USD or CAD funds.

For example, imagine I had invested the following when the USD/CAD were close to par:

30% in USD in US stocks
20% in CAD in Canadian stocks
15% in USD in international stocks
20% in CAD in North American bonds

Based on the fact alone that that the exchange rate is now $1.30 CAD to the USD, my US stocks/North American bonds would be way off their asset allocation, even if the underlying indexes had stayed the same.

Wat. Pick a currency for your asset alloc, probably the one where you expect to retire/draw down this money. Then work out your current holdings in that single currency.

Actually switching currencies makes no difference to this.
+1

Yes, the different currencies require one to do one additional step in order to work out the asset allocation. But that's really quite simple.

sparkshooter

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Re: Investing in ETFs in multiple currencies?
« Reply #8 on: July 30, 2015, 06:55:05 PM »
Wat. Pick a currency for your asset alloc, probably the one where you expect to retire/draw down this money. Then work out your current holdings in that single currency.

Actually switching currencies makes no difference to this.

I must be expressing myself poorly, because even if I work out my holdings correctly at one point (which I did), the movement of the exchange rate will substantially throw off the balance, even if everything else stays the same.

For instance - imagine that all markets and all bonds stay totally static for a year, but the exchange rate goes from 1:1 to 1:1.30. At the end of the year, even though nothing has happened in the markets, my US equities and international stocks would each be "up" 30% relative to my CAD investments. Or, alternatively, my investments denominated in CAD (Canadian bonds, North American bonds) would be "down" 30% relative to my USD holdings.

daverobev

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Re: Investing in ETFs in multiple currencies?
« Reply #9 on: July 30, 2015, 08:40:42 PM »
Wat. Pick a currency for your asset alloc, probably the one where you expect to retire/draw down this money. Then work out your current holdings in that single currency.

Actually switching currencies makes no difference to this.

I must be expressing myself poorly, because even if I work out my holdings correctly at one point (which I did), the movement of the exchange rate will substantially throw off the balance, even if everything else stays the same.

For instance - imagine that all markets and all bonds stay totally static for a year, but the exchange rate goes from 1:1 to 1:1.30. At the end of the year, even though nothing has happened in the markets, my US equities and international stocks would each be "up" 30% relative to my CAD investments. Or, alternatively, my investments denominated in CAD (Canadian bonds, North American bonds) would be "down" 30% relative to my USD holdings.

Yes. But currency is not relevant. The value of your holdings can be converted to Mars Bars if that's the scale you choose to use.

You're perhaps not getting that currency change IS part of the change of valuations. If the USD drops hard vs the GBP, and the S&P 500 doesn't move, it gets cheaper to buy the S&P 500 in pounds, but not dollars.

Hence, you pick the currency of drawdown, convert all to that, and see what your asset alloc looks like. If it's out, rebalance

691175002

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Re: Investing in ETFs in multiple currencies?
« Reply #10 on: July 31, 2015, 08:34:52 AM »
The currency of your holdings are irrelevant (with exception of small transaction cost and tax differences).

For example, consider VTI and VUN.  Even though they are priced in different currencies (VTI in USD, VUN in CAD) they both hold the same underlying.

The price of VTI and VUN in local currency can diverge, but a Canadian investor would receive the exact same return regardless of which version he holds.  In simplest terms, VTI * CAD/USD = VUN.

Imagine a Canadian investor buying USD and then investing those USD in a Canadian ETF.  The currency translations would cancel themselves out and you would just end up paying a few basis points in expenses.

When calculating your asset allocation you must convert all your holdings to the same currency.

OccamsRazor

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Re: Investing in ETFs in multiple currencies?
« Reply #11 on: July 31, 2015, 03:52:12 PM »
There's a lot of over complicating in this thread. It boils down to, do you want exposure to the USD/CAD exchange rate? Either from a speculative standpoint (you have a view that it may go one way or the other) or a future needs standpoint (you may move back and retire in the US instead).

Currently it sounds like you live in Canada, have all expenses in Canada, and expect to retire in Canada. Why have any exposure to the US (either by carrying USD balances, or USD tied investments) unless you want to take a view that the dollar will keep appreciating?

As an American, I wouldn't be invested in Canadian stocks, or long Canadian dollars, unless I had a specific view i was speculating on. If you truly don't plan to move back to the state, and don't have a view that you're speculating on, then probably best to just move all of the money into Canadian dollars. Exchange rates now are great by the way - your $50,000 USD is 65,000 CAD whereas it was 50,000 CAD equivalent not that long ago.

I say this from experience as I help corporations manage foreign exchange exposure for a living. Congrats on the move higher in USD/CAD!

daverobev

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Re: Investing in ETFs in multiple currencies?
« Reply #12 on: July 31, 2015, 05:30:18 PM »
There's a lot of over complicating in this thread. It boils down to, do you want exposure to the USD/CAD exchange rate? Either from a speculative standpoint (you have a view that it may go one way or the other) or a future needs standpoint (you may move back and retire in the US instead).

Currently it sounds like you live in Canada, have all expenses in Canada, and expect to retire in Canada. Why have any exposure to the US (either by carrying USD balances, or USD tied investments) unless you want to take a view that the dollar will keep appreciating?

As an American, I wouldn't be invested in Canadian stocks, or long Canadian dollars, unless I had a specific view i was speculating on. If you truly don't plan to move back to the state, and don't have a view that you're speculating on, then probably best to just move all of the money into Canadian dollars. Exchange rates now are great by the way - your $50,000 USD is 65,000 CAD whereas it was 50,000 CAD equivalent not that long ago.

I say this from experience as I help corporations manage foreign exchange exposure for a living. Congrats on the move higher in USD/CAD!

Wat. Most people, regardless of nationality, probably want some exposure to 'US' stocks as a large number of them are multinational. For a Canadian, you may or may not want more than Canada's global share of market cap, but you certainly don't want to exclude the USA. Going 100% of your stock in your home country is madness. Unless, perhaps, your home country is the US, but even that's a stretch.

If that is NOT what you are saying, then the currency the ETF is listed in is completely and utterly irrelevant.

WerKater

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Re: Investing in ETFs in multiple currencies?
« Reply #13 on: August 01, 2015, 01:15:07 AM »
There's a lot of over complicating in this thread. It boils down to, do you want exposure to the USD/CAD exchange rate? Either from a speculative standpoint (you have a view that it may go one way or the other) or a future needs standpoint (you may move back and retire in the US instead).

No, that is not at all what it boils down to. As we have said over and over, the particular currency an ETF is denominated in is completely irrelevant.

Obviously, the question of whether a Canadian wants to be invested in US stocks is relevant. But it has nothing to do with the original question.

Side Note:
And even the answer to this last question would typically be "yes". Diversification is useful because it reduces random risk. Unless you have reason to believe that a particular country will show better returns in the future (in which case I would like access to your crystall ball) it makes sense to invest everywhere.

OccamsRazor

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Re: Investing in ETFs in multiple currencies?
« Reply #14 on: August 02, 2015, 08:56:17 AM »
investors that have invested in European assets over the last few years have either done really well, or really poorly. Whether or not they had EUR/USD exchange rate risk is what made the difference. Lets say an American fund, raises capital in USD, invests in Europe. If they dont hedge the euro, then the investment returns are net of the euro depreciation we've seen (aka poor). If they do hedge the euro, the investment returns are just based on the underlying assets performance (aka strong). Makes a gigantic difference.

if multinational corporations exposed themselves to currency risk amd hedged nothing, calling it "diversification", their financials would just be a random mess of volatility. Kind of a similar theory with ones portfolio, in my opinion. Surely theres a way for Canadians to invest in the US market (a good idea for geographic diversification, totally agree) but hedged, or neutral, to the USD dollar?

daverobev

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Re: Investing in ETFs in multiple currencies?
« Reply #15 on: August 02, 2015, 12:06:50 PM »
investors that have invested in European assets over the last few years have either done really well, or really poorly. Whether or not they had EUR/USD exchange rate risk is what made the difference. Lets say an American fund, raises capital in USD, invests in Europe. If they dont hedge the euro, then the investment returns are net of the euro depreciation we've seen (aka poor). If they do hedge the euro, the investment returns are just based on the underlying assets performance (aka strong). Makes a gigantic difference.

if multinational corporations exposed themselves to currency risk amd hedged nothing, calling it "diversification", their financials would just be a random mess of volatility. Kind of a similar theory with ones portfolio, in my opinion. Surely theres a way for Canadians to invest in the US market (a good idea for geographic diversification, totally agree) but hedged, or neutral, to the USD dollar?

There are hedged ETFs. Over the long term, vs unhedged diversified, they tend to do worse.

Most banks offer hedged and unhedged versions, too.

The MER is higher. And the hedging not perfect.

Peter E

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Re: Investing in ETFs in multiple currencies?
« Reply #16 on: August 05, 2015, 01:40:59 PM »
For me (another Canadian Permanent Resident) the currency of holding with respect to USD vs CAD is to do with what I want to hold. I intend to hold onto VTI in the longer term, because it has a marginally lower MER than VUN, and held in an RRSP I won't have the 15% drag of dividends from US withholding taxes (you would still have this in a TFSA or un-registered account.) The difference isn't huge thought, and while I'm perfectly happy to use the Norton's Gambit to exchange currencies, if you are not happy / comfortable with this then perhaps it isn't suitable for you. This article may help: http://www.moneysense.ca/invest/etfs/ask-the-spud-when-should-i-use-us-listed-etfs/

I personally see currency risk with the US as part of the reason that I want to hold US stocks, that and the fact that the US and Canadian economies are closely linked seems to make hedging a little pointless, and certainly not worth paying for. If you wanted a hedged US total market there is Vanguard's VUS ETF.