Transitioning to another system would work (and seems inevitable at some point in the next hundred years??) but oof it would be chaotic.
Taking Vanguard for example, VGS is global equities, but VGAD is global equities that are AUD-hedged (my home country).
The only downside is that you pay more in fees (and they're less tax efficient). People generally don't bother with it though, because on a long enough time-line currencies usually revert to their long-term average, so if you're holding for retirement there's generally little point.
This is a _huge_ downside for index funds, though. Even quite a small fee difference has a huge compounding impact over time; people often miss just how much.
AIUI, assuming you're investing in a global equity fund, currency hedging is almost never worth it. It _may_ be worth it in some cases if you're investing in a foreign index (eg S&P for Europeans), but even then not usually.
Hedging is all about diversification at the end of the day. So it makes sense to hedge if you're coming close to retirement age.
On the other hand, my expenses will also be in US dollars. To what degree should I hedge against the dollar?
Ultimately the point of hedging is to diversify. So the degree you should hedge is relative to the degree with which you have exposure to your home currency. So for example, if you already own a home in that country + you already own lots of shares in that home currency, then hedging might be less important.
The recommendation I've seen is around 25% of your portfolio in hedged global equities, assuming you have another 25-30% in non-hedged global equities.
I'm actually not sure in your case. My guess is that it's something you wouldn't need to worry about, but I don't know.
Ironically last year has been good for those who held EUR based or CHF based indexes.
It's more a psychological thing, you see absolute USD return and think you could've made that but there's not the actual return, your actual return is post conversion, if you'd have hedged you wouldn't have that abosulte return either, so you've never had it.
Additionally, if you're like most people and investing regularly or DCA-ing from now on you can buy at lower USD
MSCI EM has outperformed MSCI US since it's inception in 2001 if you look at total return.
There's also some other interesting aspects of emerging markets specifically: they never went more than 4.5 years before recovering from a crash to ath, whereas it took the SP500 12 years and EU 600 index 14 to recover from the 2000 one.
There’s a stronger argument to be made for small caps, but stock buybacks allow any company’s stock to effectively experience exponential growth even with flat earnings. IE there’s little long term difference between buying back 2% a stock every year and ~2% actual growth every year assuming you never hold the majority of shares. (as in 1/0.98 ~= 1.02)
Not sure what are you trying to say.
Plenty of companies listed on foreign exchanges make the majority of their money from the US market etc.
Nope. A more accurate description is saying you’re buying into a specific subset of a Market by buying shares of specific companies. Hand waving them as if they are the same thing doesn’t actually make them the same thing.
The MSCI EM, SP500, etc etc are simply a collection of public companies not the market of a given country. Which is why index funds all behave in fundamentally different ways than the actual markets we’re talking about.
Now if you do want more exposure to the upsides of a growing economy there are options, it’s just not a simple as buying an index fund.
This thread is about indexes and it started by a user stating that emerging markets indexes have been in line or outpaced global and even most of the advanced economies ones.
Your previous statement about why in general they would have an advantage was inaccurate. As you have seemingly realized.
I mean, we're talking about index funds, where you essentially are buying a market.
For one thing you’re only buying public companies, that in and of itself is a significant difference.
It's the same as complaining that the temperature increased more in Fahrenheit than in Celsius.
EDIT: The total value is the same regardless of the fluctuations of currencies used to represent the value. Those are two independent issues.
Currencies fluctuate even if you keep them in checking accounts without investing them.
And yes, if you measure distance in feet, your son will go every year further away than you because his feet keep growing, while yours stay the same.
If I can say something has an "absolute" value of X, but I denominate it in USD, which is normally 1:1 to X, then it's value in USD in X.
but if USD drops to being worth half an X, but its absolute value hasn't changed, it will now appear to be worth 2X in USD.
so why can't one argue, if the dollar weakened by 15%, but everything else being equal, one would expect dollar denominated stocks to appreciate (in dollars) by the same amount? And if the dollar would strengthen, we would expect the stock price to depreciate?
The companies in the 500 are mostly global companies, if the USD shrunk so much they would either be losing money, or it doesn't matter because the US market is so strong it dwarfs the others.
Isn't that saying exactly what the parent comment mentioned? Since those companies are global, the growth of the S&P 500 which is USD denominated will track the devaluation of the USD as the underlying companies haven't lost value, the dollar has, and the S&P 500 would track that as growth in percentage to balance it.
I don't understand why they would be losing money since as you said they're global, and more untethered to the USD than the S&P 500.
This is clearly the USD Global index dropping a few basis points, which is an active strategy. Look at the USD Index over 15 year period, there is nothing wrong with USD today.
What I'm asking, to me it seems if the USD drops in value, but everything else stays the same (i.e. GOOG hasn't lost any real value if measured in any other currency for instance). I'd expect GOOG to rise in USD terms (as its value has stayed constant).
Why wouldn't this be true (yes, there are a bunch of assumptions/complexities, and perhaps those assumptions/complexities break the argument), but at a very simplistic level is what I said wrong?
Trump has made it clear he wants a cheaper dollar to make US exports more competitive and JPM is forecasting another 10% drop in the value of the dollar this year.
Just because the dollar and euro have been roughly level for over a decade doesn't mean that will remain true, currencies often go through pretty fast changes in relative values every few decades as their financial and geopolitical positions change. The pound drop around 2007~2009 is a good example of one such sudden but long term price shift.
> You're buying a share of productive capacity, the currency it is listed in doesn't matter.
But I don't own a fixed percentage of production, I own a fixed number of shares and the number of shares can change. If the number of shares doubles, then my investment is worth half as much.
How is that related to currency changes? That can happen anyway regardless of the currency.
Yeah, er, that's a very big if. There's no real reason to assume that, and history doesn't really bear it out.
If anything in the near term you'd probably expect the USD to weaken further vs the Euro; Trump seems _very_ keen to install a fed chair who'll cut rates even where not supported by inflation and employment numbers, whereas the ECB is more disciplined and less subject to political interference.
If you need to wait for it to recover you have lost money.
Besides, who says it will recover?
Celsius and Fahrenheit doesn't work as an analogy because the rate does not change over time as it does with currencies.
There may be some offset for goods imported from the US, but that's a minority of consumer goods globally, and even then, the purchase currency will usually still be the local fiat, and then the attractiveness of the US index fund still has to be weighed against the performance of non-US-based indices in that same local currency as opportunity cost.
I don't understand this question, are you asking if material goods and services in Europe, which uses EUR, "somewhat" follows the S&P, a US stock market index?
Do people do this? Up until some months ago, I was heavily invested in some US companies, and I never actually held USD in my accounts at any point. I used EUR to buy those stocks, the conversion happening together with the purchase, and same thing when I sold them, I received EUR ultimately.
I know I could have another account in my bank with USD set to the currency, I just don't know why'd anyone would want to, when you can convert at the point of sale/purchase. Of course, if you're doing forex trading or whatever, that might make sense, but I don't think generally people hold USD to buy/sell US stocks, because you don't have to.
Approximately no individual does this. Some companies may hold some foreign currency reserves, but even there it is not _particularly_ common in most cases.
As a European, I have never, in 40 years, had any USD, except a small amount of paper currency. If I'm buying something made in the US, I'm probably buying from a local vendor, or else will convert on the fly. If I'm visiting the US, I'll convert on the fly (this is even cheap, now, thanks to neo-banks). I own a bunch of US equity, but indirectly via a euro-denominated global market index fund. This is fairly standard. In general it's only common for individuals to hold foreign currency where the local currency is particularly unstable.
... Wait, why would you expect the price of goods to follow the valuation of, well, any market index, never mind one specific foreign market index? Like, I don't understand why you think that would happen. If anything, you'd expect a minor inverse relationship, at least on a global scale; rapid growth of cost of goods indicates inflation, which implies central bank tightening, which tends to depress stock values a bit.
Inversely, as a US investor, if you invested 100€ in the eurostoxx 50, your pile of money would have grown to about $140 (20% index growth, 15% dollar debasement). It absolutely makes a difference, that's $20 more in your pocket compared to the index.
Your comparison with temperatures is wrong. Celsius and Fahrenheit are fixed units, whereas the value of currencies fluctuate.
If you want to talk about EURUSD then just state it.
> It's the same as complaining that the temperature increased more in Fahrenheit than in Celsius.
No, that logic is flawed. Fahrenheit and Celsius are pegged to each other, the Euro and the USD are not.