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I live in the US, so I use USD for daily activity, but I plan to move to the EU in <5 years and live there long term.

My portfolio is currently denominated in 80% USD and 20% other, but I don't plan to withdraw from my portfolio until I am living in EUR denominated countries.

If it is wise, how should I best hedge my currency?

For example, rolling 1 year FX:EUR.USD futures every 6 months?

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  • What is your portfolio actually invested in?
    – GS - Apologise to Monica ♦
    Jan 30, 2020 at 7:50
  • @GS-ApologisetoMonica VXUS, VTI and MUB
    – user32205
    Jan 30, 2020 at 17:37

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Holding FX risk is typically not compensated for by a long term positive expected returns from that exposure. Therefore the common wisdom is to try to match the currency on your assets as much as possible to the currency of your liabilities/future expenses, unless you have an opinion on the direction of currencies and want to bet on it.

From your post it is not clear, whether you would continue to accumulate wealth after moving to EU or are going to live out of your savings or will face significant expenses in EUR like buying real estate there. Is is absolutely certain, that you are going to move to Europe? 5 years sounds as a pretty long horizon. Is there no possibility to need the money before that?

Based on your explanations, it would make sense to move at least part of your assets in EUR. How much would ultimately depend on your answers to the above questions. You might want to consider the following with regard to your idea to trade EUR fx futures:

  • The only known to me EUR future contract, the one listed on CME, offers high liquidity only in the next end-of-quarter maturity. It means, you will need to roll your contracts every three months to avoid high bid/ask spreads
  • Futures mark to market every day. This means that if the USD strengthens substantially vs EUR, you might need to liquidate part of your other holdings in order to satisfy margin calls (with all possible tax implications from that)
  • by being long EUR and short USD on your hedge, you accrue costs, roughly equal to the interest rate differential between both currencies, currently ca. 2.15% p.a. if the spot rate does not move. You would have those implied costs, regardless of how you decide to implement your hedging - using futures, buying EUR-hedged versions of your investments or something else.
  • the currency, an asset is denominated in, can be entirely different from the actual economic exposure of this asset. For example, if you hold an emerging market equities ETF, this will be denominated in USD, but the actual economic exposure will be of the various emerging market currencies, held within the vehicle. Same holds for commodities. When the Brexit referendum results were announced in 2016, FTSE 100 stocks shot up to compensate the sharp drop in GBP, simply because many of the FTSE 100 stocks are international companies, which do not derive all of their business out of UK. You might need less hedging that you anticipate in the first place, depending on the currency sensitivity of your assets.
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  • I am working in the US at the moment. The need for the money is unlikely, but possible. In the EU, I would still be working for a while, but at some point start using the money
    – user32205
    Jan 30, 2020 at 17:39
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    @aidan.plenert.macdonald Given your portfolio is already invested in stocks and bonds, the last point in this answer is the most important one. Look for funds that give you a similar risk profile but that balance things more towards the EU economy than the US economy. Even if they are nominally denominated in USD, the returns will follow EUR more closely.
    – GS - Apologise to Monica ♦
    Jan 30, 2020 at 23:07
  • @aidan.plenert.macdonald: after the additional information on your portfolio tickers and future cash flows: maybe it would be sufficient to slowly build up the international stocks portion of your portfolio. If you decide to use FX futures to hedge, hedging more than half of it is probably not warranted.
    – Svetkovski
    Jan 31, 2020 at 1:18
  • About point 3, is the 2.15% lost or roughly the difference in inflation rates? Meaning would I lose that implicitly by simply holding USD while living in EUR?
    – user32205
    Jan 31, 2020 at 14:43
  • 2.15% p.a. is roughly the difference in short-term interest rates in USD (1.50%) and EUR(-0.50%). There's also ca -0.15% basis, but that's not so relevant. Whoever is holding the EURs vs USD in a forward/future contract, has to be compensated for accruing negative EUR rate and forfeiting positive USD rate compared to trading it spot and being able to start accruing the more favorable rate right away.
    – Svetkovski
    Feb 1, 2020 at 14:47
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Well, buying the EUR/USD in a forex account requires paying daily rollover interest and possibly as much as 2.5% annually on the leveraged amount when including commission. Buying a EUR futures contract in a dollar futures account is similarly disadvantaged by contango but the contract price can be percentage related to the spot price and annualized.

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