Effect of fluctuating currencies on overseas investment?

brasso

I've been investing for some years, but very rarely in US stocks.

I should know the answer to this question, but every time I try to work it out, I find it confusing. What is the impact of a fluctuating exchange rate in terms of timing and currency quoted?

Just for example, say I wanted to buy an ETF focusing on US equities. It may be offered in USD and GBP. Is there an advantage in choosing one over the other at a time when the pound is strong against the dollar?

Let's say that after a year, the fund has gone nowhere, is still at the same value in USD, and I want to sell. But in the meantime, the pound has weakened against the dollar. I have to sell the holding through my UK platform, so it will all be returned to me in GBP. Am I going to receive less now that the pound has weakened, or more, or does it make no difference?

Can anyone enlighten me? I've knocked up a spreadsheet to try to work this out, but I'm sure there must be a simpler rule of thumb I could use.

Thanks in advance.

jimjames

Overseas investments will generally be affected by exchange rates.

So if a share in USA is $1 and exchange rate is £1=$1 then you'll get one.

If rate increases to £1=$2 then your investment has now halved in your currency although unchanged in dollar terms.

Round other way if you bought at £1=$2 and the rate dropped to £1=$1 dollar then you've doubled your money without any change in the investment. As such you could see that the current time with rate around $1.70 is a good time to buy dollar assets.

brasso

Thanks for that, jimjames.

And if I'm offered the choice of buying the fund as USD or GBP, as is often offered, does it matter which one I choose, given the strong pound at present?

JohnRo

I'd be cautious about declaring the pound strong at present. If you look back to before the financial crisis of 2008 there's nothing remarkable about the current exchange rate.

http://www.oanda.com/currency/historical-rates/

Have a play about with this and see if it helps you decide.

ozzage

To try to answer the actual question, I've never really understood the advantage one way or the other.

The currency risk comes from being invested in assets which are held in another currency, so I can't really see how the currency, in which the investment is quoted, matters.

Perhaps somebody can enlighten us both.

Reaper

brasso wrote: »

Just for example, say I wanted to buy an ETF focusing on US equities. It may be offered in USD and GBP. Is there an advantage in choosing one over the other at a time when the pound is strong against the dollar?

I don't think there is any advantage of one over the other if the equities inside the fund are held in USD. If you have an example of one priced in both try doing a comparison of the graphs, I would be interested to hear if there is a difference.

IronWolf

The only advantage would be that you dont pay currency conversion charges, which can be steep, when you buy a GBP version.

But it is also a bit harder to hedge against the currency if it isnt denominated in the foreign one.