Which Currency Should You Pick For Your Diversified Portfolio Of Index Funds?
Imagine this for a moment. You’re a young, single person walking along a path and you stumble upon an ancient lamp with instructions on the side. “Rub me,” it says, “and your dreams will come true.” Curious, you rub that lamp and a genie appears. She offers one thing.
She says, “Every young, attractive, eligible man or women [you get to choose the sex] will find you irresistible for life.” You rub the lamp excitedly. Unfortunately, this might spell plenty of trouble. With all the options to choose from, it might be almost impossible to choose a life partner.
Such is the case with investing. You might want a diversified portfolio of low-cost ETFs. But there are so many options. To compound the problem, they trade in different currencies.
For example, you might want a global stock market index. Should you buy Vanguard’s FTSE All World ETF? It provides exposure to almost every global stock market. It trades on the London Stock Exchange under the symbol VWRL, and it’s priced in British pounds.
Or, should you buy the iShares Core MSCI World ETF? It also tracks the global stock market. It trades on the Amsterdam stock exchange under the symbol, IWDA and it’s priced in Euros.
Plenty of people face such dilemmas. They might see Vanguard’s FTSE All World ETF and say, “It trades in British pounds. If Brexit causes the pound to crash, I would lose a lot of money.”
Others might fear the iShares Core MSCI World ETF (IWDA). They might say, “I don’t trust the Euro. If it falls hard, I might lose a fortune.”
Such thinking might sound smart. But it’s completely wrongheaded. In most cases, if you’re building a diversified portfolio of low-cost ETFs, the listed currencies shouldn’t matter. Yes, you read that right. For diversified investors, the listed currency of their ETFs is largely irrelevant.
Here’s an example. Assume you and your friend each win $100,000 USD from a trip to Las Vegas. You each decide to buy a global stock market ETF with the proceeds. You decide to buy one that’s listed in British pounds. Maybe you think the British pound is low. Converting to pounds, you believe, offers a good deal.
Your friend decides to convert to Euros, so she can buy the global stock market ETF that’s listed in Euros. You and your friend purchase your respective ETFs at the same time, on the same day.
Now assume the British Prime Minister mandates a nationwide conversion to Scientology. She also borrows trillions of pounds to build a Trump-inspired wall to surround the United Kingdom. Such strange behavior would likely crash the British pound.
Assume the Euro remains stable while the British pound falls. Would you regret not buying the global stock ETF priced in Euros, like your friend? In truth, it wouldn’t matter. If the British pound fell 50 percent, compared to the Euro, the price of the global stock index, priced in British pounds, would double.
That’s because it isn’t an investment in British pounds. It’s an investment in thousand of shares from dozens of countries. In effect, it represents several different currencies. Now imagine that you and your friend both decide to sell. Once again, you sell on the same day, at the exact same time. You each convert your proceeds back to USD, so you can take an ill-advised trip back to Las Vegas.
You might wonder who’s going to come out ahead. Will it be you? After all, you initially converted into British pounds, thinking you would get a deal on your global stock index. Then the pound crashed and your money quickly doubled. This all sounds confusing. But one measurement will tell the truth:
When you and your friend both convert your investment back into USD for that fateful Vegas splurge, who will have more money?
If your friend says, “We would have the same amount,” she would be correct. If you’re building a globally diversified portfolio of ETFs, the listed currency doesn’t matter. If you have a lump sum to invest, there’s no “better deal to be had” by converting to British pounds, Canadian dollars, Australian dollars or Euros before buying your ETFs.
However, if you’ve read my book, Millionaire Expat, you’ll notice that my portfolio models are listed in different currencies. For example, if someone plans to retire in Europe, I listed portfolios of ETFs that are priced in Euros. If someone plans to retire to Canada, I recommended ETFs priced in Canadian dollars.
This isn’t based on projections of where each currency is headed. Once again, that doesn’t matter. Instead, my model portfolios were listed in different currencies based on convenience. For example, if someone will eventually retire to Europe, they’ll pay their future bills in Euros. If the portfolio is already listed in Euros, the retiree won’t have to convert from a foreign currency into Euros every time they make a withdrawal.
The level of the Euro, at the time of conversion, once again doesn’t matter. But the retiree would have to pay a pesky bid/ask spreads (and possibly commissions) each time they convert some of their portfolio into Euros to cover that year’s spending money. Most retirees wouldn’t want that kind of hassle.
Always remember that the listed currency of an ETF doesn’t necessarily represent the investment’s currency. Yes, a Canadian stock index priced in Canadian dollars really is an investment in Canadian stocks–and Canadian dollars. A European stock index priced in Euros really is an investment in European stocks–and in the Euro.
But a Canadian stock index priced in USD is really an investment in Canadian stocks and Canadian dollars. A European stock index priced in British pounds is really an investment in European stocks and the Euro.
Smart investors build globally diversified portfolios. They don’t fret over the currencies of their ETFs. After all, doing so doesn’t show sophistication. It reveals a lack of knowledge instead.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas
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