Fx risk question

[jayou8]

Let's say I bought lump sum a ETF listed in USD 10 years ago. If USD has depreciated 20% against SGD in these 10 years, when I cash out my ETF into SGD, would I have lost 20% of the returns?

If not, why? Also how different will the answer be if compare to buying a USD bond portfolio with same deprecation of USD please?

 

[hwckhs]

Let's say I bought lump sum a ETF listed in USD 10 years ago. If USD has depreciated 20% against SGD in these 10 years, when I cash out my ETF into SGD, would I have lost 20% of the returns?

If not, why? Also how different will the answer be if compare to buying a USD bond portfolio with same deprecation of USD please?

Assuming the ETF price remained flat in that 10 years, then yes, your return in SGD term is -20%.

A diversified stock ETF such as MSCI World/MSCI ACWI/FTSE All World has a high probability of having a return much higher than 20% in 10 years such that, even after converting back to SGD, the return will still be positive.

Conventional wisdom says that foreign currency bond fund is not recommended, unless you wish to retire in that country. It is not worth to take the FX risk just for a little bit higher return. I used to hold a USD bond ETF for 2 years, and recently decided to change it to MBH. What a relief...

IMO, USD-quoted stock ETFs (VWRA/ISAC/IWDA etc) are OK, but better avoid USD bond ETF unless you know what you are doing.

 

[jayou8]

Assuming the ETF price remained flat in that 10 years, then yes, your return in SGD term is -20%.

A diversified stock ETF such as MSCI World/MSCI ACWI/FTSE All World has a high probability of having a return much higher than 20% in 10 years such that, even after converting back to SGD, the return will still be positive.

Conventional wisdom says that foreign currency bond fund is not recommended, unless you wish to retire in that country. It is not worth to take the FX risk just for a little bit higher return. I used to hold a USD bond ETF for 2 years, and recently decided to change it to MBH. What a relief...

IMO, USD-quoted stock ETFs (VWRA/ISAC/IWDA etc) are OK, but better avoid USD bond ETF unless you know what you are doing.

Thanks for the reply. I was just wondering if there is a way to hedge the fx risk.

For Bonds, it seems to be clearer as income is fixed and predictable. So might be able to forward hedge.

However, I am not sure if it is possible to hedge a ETF as not sure how to segregate the fx risk.

 

[reddevil0728]

Thanks for the reply. I was just wondering if there is a way to hedge the fx risk.

For Bonds, it seems to be clearer as income is fixed and predictable. So might be able to forward hedge.

However, I am not sure if it is possible to hedge a ETF as not sure how to segregate the fx risk.

it cost money to hedge fx and may not be perfect hedge also.

u can always but currency futures?

 

[GameTheory]

Thanks for the reply. I was just wondering if there is a way to hedge the fx risk.

For Bonds, it seems to be clearer as income is fixed and predictable. So might be able to forward hedge.

However, I am not sure if it is possible to hedge a ETF as not sure how to segregate the fx risk.

Go for professionally managed fund / UT.

there are fixed income funds which is SGD-hedged, they have the economics of scale and connections for cost effective hedging

 

[Inediblebulk]

IMO, fx risk is not so much of a concern if the etf is diversified or large cap.

Most large cap US companies do not operate only in US but all over the world. Their revenue and assets are based on other currency too.

E.g if the asset is based in SGD and SGD rises 20%, the USD equivalent
Of the same asset will also rise by 20%.

 

[jayou8]

IMO, fx risk is not so much of a concern if the etf is diversified or large cap.

Most large cap US companies do not operate only in US but all over the world. Their revenue and assets are based on other currency too.

E.g if the asset is based in SGD and SGD rises 20%, the USD equivalent
Of the same asset will also rise by 20%.

that makes perfect sense. also I guess companies do hedge their fx exposure even though you do hear all the time jpn auto makers losing $ due to fx.

however 20% devaluation would already equate to a USD dollar crisis and that would sure impact the global financial markets and possibly a crash in the stock markets. although this is hypothetical but nobody can rule it out that it will not happen in the near future,

wouldnt it be a double whammy should such a scenerio happen where you lose both in fx and equities valuation? guess fx risk is one that I should take into account when investing in non-domestic ccy portfolio?