Brokers, Currencies and ETFs - Newbie Investor

Toby76

Hi to you all

I am a UK citizen currently living in Israel. I recently opened an account with TD Direct International and invest in the ETFs: VWRD and SAAA on a regular basis. Each time I make a purchase, I exchange the money I earn in Israeli shekels into GBP and make an international transfer to TD Direct's account in Luxembourg. This is costly and rather inconvenient.

I have chosen the above funds as I like to have some of my investments outside of Israel due to the volatility of this part of the world. Never say never....

Bearing in mind what I wrote above, would how would things differ if I contributed to the exact same above portfolio but with an Israeli brokerage firm in Israeli shekels? Will I be subjecting myself to country/currency risk or anything else?

Appreciate your help.

bowlhead99

The israeli brokerage firm would take your shekels and have to convert them to GBP (or USD, depending on if you're buying an ETF priced in GBP or USD) to buy into the ETFs of your choice on the stock exchange of your choice. I would assume a competent broker could get roughly the same exchange rate for the shekel to [desired currency] exchange as your current currency broker.

Once the ETF has been bought, the underlying assets (eg an ownership slice of Microsoft's business, Exxon's business, Apple, Shell, HSBC, Glaxo, Samsung etc) are the same as what you currently have today. The businesses have global assets and liabilities and revenues and expenses in all sorts of currencies but just so happen to be listed on a UK or US or Korean stock exchange and priced in pounds or dollars or won. Then the ETF that holds them is priced in pounds or dollars or euros or whatever. But your 'currency risk' is the risk that the underlying assets of Microsoft or HSBC or Samsung become more or less valuable against the currency you'll ultimately want to have a lot of when you're looking to cash out.

The fact that a Microsoft share is listed in dollars or an ETF happens to be listed in pounds is just a way of pricing the statement of what something is 'worth'. But if the FX rates were different, the price statement would be different, but it wouldn't change the 'worth' of an ownership slice of Microsoft's business and Exxon's business and Glaxo's business etc. So, forget 'currency risk'. It is unchanged whether you sell shekels to buy GBP and give them to a European broker to buy a GBP or USD ETF, or whether you give your Israeli broker shekels to buy GBP or USD to buy the ETF. The investment risk is the ownership share in Microsoft, HSBC and Samsung and what their profits and assets will buy you in your country and currency of choice in 20 years from now.

Aside from currency risk (red herring) you mentioned country risk. Those of us from UK who don't spend time in Israel may perceive that Israel has higher country risk. It is at war with Palestine and hated by a number of its local international neighbours.

If your broker is merely arranging for you to buy a share in VWRL and obtaining from Vanguard a share certificate evidencing that you are a registered owner of 1000 shares in VWRL, it doesn't really matter if the broker is physically sitting in London or Amsterdam or Luxembourg or New York or Tel Aviv. If you hold shares in an ETF (or directly in a company like Microsoft for that matter) it doesn't really matter who helped you buy them.

However, these days the most affordable brokers do not arrange for you to be the registered owner with the ETF or Microsoft and have Vanguard or Microsoft's company secretary produce a paper certificate in your name. Shares are 'dematerialised' from paper into electronic format and if you yourself do not have an electronic account directly with the settlement system, you need to have a broker or custodian hold them on your behalf - as nominee (in their name but for your benefit). That's presumably what your are doing with TD Lux at the moment.

You might judge that if your ownership of the fund is going to be someone holding a share in the fund electronically in their name for your benefit, you feel safer that the 'someone' is TD, fully regulated by the CSSF in Luxembourg and part of TD bank... rather than some back street broker in Tel Aviv who has to deal with an incoming SCUD missile from Gaza, Iraq, Libya or whoever hates Israel the most these days. Of course, I appreciate that Israel is a developed country and not some third world backwater, and my flippant comment is made with naievty as to the levels of financial services regulation and consumer protection that exists locally from the TASE, ISA or others.

You will probably find perfectly credible mainstream brokers operating near you which deal in foreign shares, and pricing to do what you want might be more competitive than going through TD. However, even if you're using a big name such as Citi or HSBC, country risk still exists because if the middle east becomes a sh1tstorm, and sanctions and asset freezes are thrown about willy nilly, then the local subsidiaries of global banks do not get out scot free. By contrast, Luxembourg is at the heart of Europe and politically very stable.

Toby76

Many thanks for your detailed response!