Expatriate Investors: Does It Matter Which Currency Your ETF Is Listed In?
It’s a common question.
Does it matter what currency my ETF is listed in?
The short answer is no.
But people get fooled by this. Here’s an example.
Investors might look at two ETFs. Assume that each ETF tracks the U.S. stock market. But one of the ETFs is listed in USD, the other is listed in Australian dollars.
The investor then looks at the performance result for each. Investors could look at the iShares S&P 500 ETF (CSPX). It trades on the UK market. It’s listed in USD. It gained 0.79 percent over the 12-month period ending April 30, 2016.
Investors then wonder whether the same ETF, listed on the Australian exchange, posts better returns. Over the same 12-month period, the iShares S&P 500 (IVV) lists a 12-month performance of 4.55 percent.
But don’t be fooled. As long as their expense ratios are the same or similar, their performances will be identical. That’s because they both track the U.S. stock market, hence the U.S. dollar.
Again, the true gain or loss of the ETF is completely dependent on the stock market (and currency) of the underlying stock market(s) that the ETF tracks.
In the above example, the Australian dollar fell nearly 4 percent to the USD over this time period. So, the ETF that’s listed in Australian dollars gives the illusion of making more money. It didn’t. Regardless of the listed currency, this was an investment in U.S. stocks. It was also an investment in the U.S. dollar because it tracks an index called the S&P 500. This index is made up only of U.S. stocks. It would never be an investment in Australian dollars, even if the ETF were listed as such.
This leads to the questions I get about currency risk. An investor from England, for example, might be interested in buying a UK stock market index (ETF). If that ETF is listed in Euros, she may be concerned. She may think that her performance will depend on the Euro. But it doesn’t. It’s an investment in British stocks and the British pound. The listed price (in Euros) has no bearing on how the index performs.
If the British stock index stayed flat for the year, but the Euro fell 20 percent, her ETF would post a listed gain (in Euros) of 20 percent. Did it gain that much? No, it would have gained nothing if measured in British pounds. By investing in a British stock market index (no matter what currency it was priced in) she wouldn’t be betting on the Euro at all. She would be betting on the British pound.
I first posted this on May 11th. Immediately after posting it, a reader asked a question. I’ve pasted it here (and you can still see it as the post’s first comment):
“I invest mainly in VWRD through the London Stock Exchange. If the UK economy crashes, will my holdings be dramatically affected? Obviously this scenario would influence the UK currency.”
I’ll repeat what I wrote above.
The listed currency of the ETF has no bearing on its value. A global stock index is invested in global stocks. Almost every currency is represented in that index. The UK pound would have no bearing on the index’s true value.
If the UK pound dropped 90%, his world stock index would report a “gain” of hundreds of percentage points. Again, the listed currency of the ETF has no bearing on the ETF’s value.
Of course, if it’s an ETF that tracks the UK stock market, and it’s priced in pounds, then the listed currency price matters. I’ll repeat this again:
The only thing that matters is the underlying currency (or currencies) that are represented by the ETFs holdings.
Why choose one listed currency over another?
If you are paid in Euros, then buying ETFs that are listed in Euros makes sense. If you are paid in Canadian dollars, then buying ETFs listed in Canadian dollars also makes sense. Likewise, if you know you are retiring to a given country, buying ETFs listed in that currency makes a bit of sense–but not for the reasons that you might think.
Remember, the listed currency of your ETFs is practically irrelevant.
But if you are retiring to France, and your ETFs are listed in Euros, then you won’t pay currency conversion spreads when you sell. If I owned the same ETFs, listed in Euros, and I retired to Canada, I would pay a small currency conversion spread when I sell and convert to Canadian dollars.
Small. Currency Conversion. Spreads. That’s it. The movement of the currency wouldn’t mean a thing.
I’ll repeat that. The movement of the currency that your ETFs are listed in won’t mean a thing.