Why the currency of your investments does not matter

Let's start with a simple example

Say there are two ETFs which are perfectly identical in their holdings, cost, dividends, and thus returns. However, they differ only in the currency they are traded in. In this regard, would buying them give us the same return, or a different return? The short answer is that the returns will be exactly the same.

Let's use a simple scenario whereby one ETF is traded in Singapore Dollars (SGD), and the other is traded in US Dollars (USD). Further assume that the ETF has only 2 shares, and both shares are from China.

After one year

After one year, the shares make a gain of 20% in Chinese Renminbi terms. You can assume they rise from $1 RMB to $1.20 RMB.


Before
After
CNYUSD
5.0
6.0
CNYSGD
4.0
5.0
SGDUSD
1.25
1.20

The exchange rate of CNYUSD increases from 5.0 to 6.0. The exchange rate of CNYSGD also increases from 4.0 to 5.0. In this regard, the exchange rate of SGDUSD must be equal to 1.2 (one USD gives 6 CNY, which gives 1.2 SGD). The initial SGDUSD rate must be 1.25 (one USD gave 5 CNY, which gave 1.25 SGD)

And after exchange rate changes

Initially, the cost of the ETF is $0.20 USD ($1 RMB/5). Now, the price remains the same at $0.20 USD ($1.20 RMB/6). If you were to convert this to SGD, you would be able to get $0.24.

Now, we could also have bought the ETF that was traded in SGD. Initially, the cost would be $0.25 SGD ($1 RMB/4). Now, the ETF would cost $0.24 in SGD ($1.20 RMB/5). This is exactly the same number as above.


Initial cost
Current price
RMB
$1
$1.20
USD
$0.20
$0.20
SGD
$0.24
$0.24

In other words, there is no difference if we had bought the ETF that is traded in SGD or USD. This also applies to any other currencies, such as GBP or EUR and so on.

However, this golden rule must be present

There is of course a caveat. That is, there must be no arbitrage in the exchange rates. Directly exchange USD for SGD must be the same as exchanging USD for CNY and then exchanging CNY for SGD.

If this no-arbitrage condition holds, then there is no difference in the currency  no matter the number of stocks nor the country of origin of the stocks.

In summary

On this note, in reality, there are transaction costs whenever we convert currencies. Keep currency conversion to a minimum in order to keep costs low. For myself, I only buy ETFs and never sell them, reaping dividends as they are given out.

The main point of this post is that there is no difference as to what currency the stock or ETF is traded in. So the next time you invest, the traded currency shouldn't be one of your considerations for purchase!
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5 comments

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9 October 2016 at 09:59 delete

Guess you haven't been through AFC and high 1X% foreign Fixed Deposit Rate with AUD and NZD and still lose money after maturity. Currency matters!

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9 October 2016 at 10:15 delete

Agree with you slightly only. The fixed deposits invest in different underlying instruments.

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9 October 2016 at 11:11 delete

But I agree too, that markets can get irrational at times of euphoria or pessimism that the no-arbitrage rule gets violated. Just like how perfectly good stocks get battered down to astonishing low prices during a financial crisis.

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Gerspooken
AUTHOR
5 July 2017 at 01:53 delete

If you are earning in a foreign currency and you send money back to your investing vehicle in Canada like TD Waterhouse, aren't you already paying a conversion fee (even before investing)? Then, aren't you getting dinged a second time on the currency exchange if you then take that newly converted Canadian dollars and bought a Vanguard bond off of the Australian stock exchange?

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5 July 2017 at 16:53 delete

You are referring to transaction costs. You will incur them whenever you have currency conversion.

Economically wise, the listing currency doesn't matter, only the economic performance does.

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