Currency fluctuations when investing in non-EUR stocks

leo738

Hello All,

I'm about to start investing for the long term & am considering something like regular purchases of an indexed ETF, such as the Vanguard 500 Index Fund (NYSEARCA:VOO).

I'm concerned however that long term currency changes (US v's EUR) will erode any gains.

I see they also trade the ETF on the London exchange in GBP, obviously another currency so still the same problem.

Another approach would be to invest some in USD & some in EUR in a similar fund on the DAX.

Has anybody any thoughts or approaches worthwhile, or can point me in the direction of some research?

As I mentioned it's for the long term (10+ yrs).

Leo

radioactiveman

Hi leo
It is a risk - but if you take a long term view the currency fluctuations shouldn't affect you too much.
You could lose any amount theoretically due to currency risk. But if you look at the long term returns of some stocks it puts it into perspective.
E.g. according to this article Coke returned on average about 13% to 14% per year since 1987 and would have changed $10,000 into $230,000 such is the power of compounding with dividends (etc etc):

http://seekingalpha.com/article/1441391-what-if-long-term-dividend-investors-buy-before-a-crash

So depends on the rate of return of the investment really, but if you made 200 grand (scratch that 100 grand after Irish tax) over 25 years you would be pretty happy even if the currency fell 50% in that period. In other words if you make a great investment the currency won't hold you back.

It's worth checking what the underlying assets of a company are also, not just the currency they're quoted in. E.g. European oil companies that have their assets (oil) quoted in dollars, so their price is affected by currency movements even though it's under the hood so to speak.

Also it's very hard to tell long term what will happen regarding the euro vs the dollar. In dollar's favour: stronger growth than here, may be energy independent in the next few years which will support the dollar.
Against: massive money printing, massive deficit.
Who knows in 30 years time we could be out of the euro and only the strong north european countries could be in it. In that case the Euro would be very strong. But converting from dollars back into our new pixie currency could be very profitable

leo738

Thanks for the reply,

I've also just begun researching ETF's and as you say there treatment for tax purposes seems very unclear:

http://www.askaboutmoney.com/showthread.php?t=175887

What you say about the currency issues seems to make sense, but as I have little or no experience in the field I'm unsure.

Regards,

Leo

radioactiveman

Best to go with a european ETF to avoid the currency risk. You can get ones that track the top 50 european stocks, in fact there's a huge range of them.

They are shares so tax will be 33% on any increase in share price (capital gains) and your higher rate of income tax on dividends, plus PRSI plus USC etc. You have to declare that then and make a return. I can't see many people making money off dividends these days if govt. are going to take over 50% of them...

leo738

radioactiveman wrote: »

They are shares so tax will be 33% on any increase in share price (capital gains) and your higher rate of income tax on dividends, plus PRSI plus USC etc. You have to declare that then and make a return. I can't see many people making money off dividends these days if govt. are going to take over 50% of them...

Hmm,

I realise they are traded similar to shares but they are many differing opinions of how they are treated for tax reasons. It seems to differ from scheme to scheme & gross roll up (never heard of the term until 2 weeks ago!) & 8 yr assumed disposal may or may not apply.

But as you say € dominated ETF may be the way to go to avoid currency risks.

Leo