9

I am about to purchase international stock and bond ETFs as part of my retirement portfolio.

I am concerned about currency denomination. Suppose that I purchase an ETF in Euros and when I start selling it at age 65, the Euro has significantly gone down in value and now I don't have enough to retire. Is it possible to sell the ETF in a different currency of my choice to avoid this problem?

  • 2
    Why would the currency of the sale proceeds in any way matter? – littleadv Jun 8 '15 at 4:05
  • 1
    Which country are you from? – base64 Jun 8 '15 at 11:45
  • Thanks Dheer. I heard of a concept called journaling which would involve transferring the etf in say usd to euros if the equivalent etf is available. Is it possible to do this? Littleadv - would not the currency matter when I start selling the etf to fund my retirement eg if I had the vanguard world stock etf in usd and the dollar experienced a significant drop, would that not affect my portfolio, would that not mean that the value of my etf has dropped? Base64 - I am from Cyprus living in the UAE. – basement jaxx Jun 8 '15 at 15:20
5

Generally one should build the retirement fund in the currency one would like to have when retired. Doing anything else will have a currency risk already indicated by you.

If the horizon is long enough, then one should convert into retirement currency at the right opportunity. Having a currency future is another option, however for individuals it would be tedious and the options are not available in long term horizon.

2

The product you are looking for is Currency Hedged ETF. It is useful for canceling out currency risk, but it has a slight performance drag if 20 years later the exchange rate went back to the original point (unchanged).

First, you need to define where you want to retire. If you are certain that you will retire in Cyprus (Spending Euro for the rest of your life), you need to buy an ETF that is hedged to EUR.

An ETF that is settled in Euro does not necessarily mean that it is hedged to EUR. You need to find an ETF that has the word "Hedged" in the title. One is example is iShares MSCI World EUR Hedged UCITS ETF. This one is both sold in Euro and Hedged to Euro. Inside this ETF contains US Stocks, but the performance of the US Component is determined by the raw index (S&P 500) and is not affected by changes in EURUSD.

In other words, anything about journalling to certain currency or settling in certain currency is irrelevant.

If you want to retire in UAE, you need to buy ETF hedged to USD. An example is iShares Currency Hedged MSCI EAFE ETF. It is settled in USD and hedged to USD.

  • thanks for the info. Ok, so we got 2 issues. But doesn't the currency I settle in i.e. sell matter also? Is there a way to sell the etf in another currency? Also, there are cons to hedging. Over the longer term it doesn't matter so much and costs of hedging may not benefit in the long run. Just wondering what people thought, especially since hedging involves me assuming that I know what the market will do? – basement jaxx Jun 9 '15 at 12:10
  • Settlement currency does not matter at all. The net asset value of a fund is linked to the base currency of the underlying. You have to get over this. The cost of hedging is not overly significant as the funds hold swaps with terms close to government risk free rates. You do not have to manage the hedge. All you hold is 1 ETF. You do not hold futures contract or do rebalancing or put up margin. – base64 Jun 9 '15 at 12:23
1

It is very helpful to consider how you will spend your money in retirement. A lot of your expenses in retirement, especially services, are priced in Euro and paid for in Euro. However, many expenses depend on global prices like electronics and clothing, and as I'm sure you've noticed recently in Cyprus and the UAE, the strength or weakness of your currency can make a big difference in the price of those goods and on your quality of life.

If you were to go and just invest in a balanced international portfolio like the Vanguard Total World ETF you would have too much foreign currency exposure and if the Euro was particularly strong at retirement, the local goods and services might be relatively too expensive. However, if you hedge all your international portfolio back to Euro like base64 suggests, you could be in a tough spot buying your needed global goods if the Euro is particularly weak. While you could get lucky in either of these scenarios if the Euro moves the right way at the right time, it can be a dangerous thing to bet on.

Your expenses in retirement are almost certainly more balanced than either of the two extremes above, so your portfolio should be balanced as well. Luckily, there are two fairly simple ways to accomplish this that are generally available to a European investor. One is to have a globally diversified portfolio with a bias toward the local currency; while you lose some of the diversification benefits of a fully global portfolio, this is generally very easy to set up and maintain. Also, you could have a more global portfolio but hedge some of the currency risk to your local currency. The best way to do this these days is holding currency hedged ETFs as base64 suggests; just make sure it is only part of your international portfolio. However, this can add more costs to your portfolio.

While I can't give you what percentage in Euro is the best percentage. One thing to keep in mind though as you think about your retirement spending is that both goods and services have been getting more globally priced over time. If you think this will continue to when you retire, as I do, you may want to bias your portfolio to have more foreign currency exposure than someone that would be retiring sooner.

Edit: @base64 Fully-hedged etfs actually add currency risk when compared to Demos' retirement expenses which will not be 100% Euro denominated as he will need to buy a combination of global and local (Euro) goods. My best guess for a portfolio that makes not Demos' portfolio but more important Basement Jaxx's retirement agnostic to currency moves is a globally diversified portfolio either with a tilt toward European stocks or with a small amount of currency hedged international etfs.

  • Thanks Rhaskett. Hedging would imply that I know which way things will go, which I don't so I guess I will avoid hedging. I am going for vanguard's world stock etf and the international bond etf, in which I will be getting that exposure. Thanks for that. – basement jaxx Jun 11 '15 at 12:33
  • 1
    @Demos What you are thinking is not correct. When you know that foreign currency will appreciate, you do not hedge (i.e. you are in long position). When you don't know which direction the foreign currency is going (maybe up maybe down), you hedge it and you become neither long or short (net 0 position). If you know that foreign currency will depreciate, you overhedge (invest $10000 in foreign stocks but hedge for $12000). I hope you understand. By holding VT ETF right now, you are saying to yourself "I believe foreign currency will appreciate". – base64 Jun 11 '15 at 20:29
  • rhaskett is right about having an unhedged globally diversified basket though. – base64 Jun 11 '15 at 20:36
  • 1
    @base64 I added an edit emphasizing that making Demos' portfolio neutral to currency moves is not a great goal. More important is making Demos' retirement neutral to currency moves. – rhaskett Jun 11 '15 at 22:22
  • Thanks guys. I have looked at both sides of the argument and checked my provider for etfs that are available. Unfortunately here in the UAE, we are very limited in access to etfs. No currency hedged options are offered in relation to the broad etfs I am interested in. I suppose a more european tilt could work so will have a look at what is available. Your comments have been great, much appreciated! – basement jaxx Jun 13 '15 at 9:43

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.