Question regarding tracking error/cash drag on ETF

Jairus

Hi All

Can somebody offer some advice regarding a current negative return on a 90% growth 10% defensive asset portfolio with an inception date of 8th March 2017? Aside from last week's slump, the growth portion is still positive. I'm with Degiro and taking into account the connection fee, dividend tax and tracking error etc I can't understand why this portfolio I'd not in the black? Is there some excessive hidden fee I'm missing? It seems that the good days are not good enough and I lose excessively on a poor day.

Thanks
J

gavmcg92

Jairus wrote: »

Hi All

Can somebody offer some advice regarding a current negative return on a 90% growth 10% defensive asset portfolio with an inception date of 8th March 2017? Aside from last week's slump, the growth portion is still positive. I'm with Degiro and taking into account the connection fee, dividend tax and tracking error etc I can't understand why this portfolio I'd not in the black? Is there some excessive hidden fee I'm missing? It seems that the good days are not good enough and I lose excessively on a poor day.

Thanks
J

Stocks are listed in the currency of where they're domiciled and the overall portfolio is listed in euro. I know it's a silly point to make but even if the individual stocks are showing positive growth, the EUR/USD exchange rate may be putting your portfolio in the red?

Jairus

gavmcg92 wrote: »

Stocks are listed in the currency of where they're domiciled and the overall portfolio is listed in euro. I know it's a silly point to make but even if the individual stocks are showing positive growth, the EUR/USD exchange rate may be putting your portfolio in the red?

Cheers Gav I went away and thought about it and it seems to be t be logical choice. However am I correct in saying that the portfolio needs to be posting 5/6/7% annually just for it to remain in positive territory after taking currency exposure into account? I appreciate being exposure to US stocks at the moment isn't great with the Euro/USD position, but surely long term the loss/gain evens out?

dRNk SAnTA

Jairus wrote: »

However am I correct in saying that the portfolio needs to be posting 5/6/7% annually just for it to remain in positive territory after taking currency exposure into account?

Perhaps I don't follow your logic, but this doesn't seem correct to me.

Currency fluctuations can mislead you on performance in either direction - positive or negative.

For example I have a complex situation. I have a GBP Sterling trading account, buying US/Euro shares.

At the moment everything appears to have grown rapidly. However, this is primarily due to the GBP falling against the Dollar & Euro in the past 12 months.

Even if the underlying assets had grown 0% (no growth), my account would still show a much increased GBP value, because the same US stock now costs much more Sterling.

Next year, the underlying assets could grow 5%, but a much strengthened GBP could mask this and even show me negative growth in GBP Sterling.

This would be important if I was living in the UK & spending Sterling. But what I care about is the value of my account in Euros today vs the value of my account in Euros 12 months ago.

In summary, if you own UK company shares with a Euro trading account. The company stock could have grown over the past 12 months, but all growth is hidden by the crashed value of GBP. This situation could reverse again in 6 months time.

IMO the best you can do is stay diversified across different currencies, and hope for a certain amount of stability in the world!

Jairus

dRNk SAnTA wrote: »

Perhaps I don't follow your logic, but this doesn't seem correct to me.

Currency fluctuations can mislead you on performance in either direction - positive or negative.

For example I have a complex situation. I have a GBP Sterling trading account, buying US/Euro shares.

At the moment everything appears to have grown rapidly. However, this is primarily due to the GBP falling against the Dollar & Euro in the past 12 months.

Even if the underlying assets had grown 0% (no growth), my account would still show a much increased GBP value, because the same US stock now costs much more Sterling.

Next year, the underlying assets could grow 5%, but a much strengthened GBP could mask this and even show me negative growth in GBP Sterling.

This would be important if I was living in the UK & spending Sterling. But what I care about is the value of my account in Euros today vs the value of my account in Euros 12 months ago.

In summary, if you own UK company shares with a Euro trading account. The company stock could have grown over the past 12 months, but all growth is hidden by the crashed value of GBP. This situation could reverse again in 6 months time.

IMO the best you can do is stay diversified across different currencies, and hope for a certain amount of stability in the world!

Hi. I'm a tad confused - surely if your account is in GBP you would be seeing negative results due to the dollar strengthening against Sterling? As in it would cost more GBP to own the same US stock? It seems to be the case for me with a EUR account and solely US stock exposure. The EUR/USD has gone from 1.07 to 1.11 since I purchased the ETF's.

Thanks

Jairus

Jairus wrote: »

Hi. I'm a tad confused - surely if your account is in GBP you would be seeing negative results due to the dollar strengthening against Sterling? As in it would cost more GBP to own the same US stock? It seems to be the case for me with a EUR account and solely US stock exposure. The EUR/USD has gone from 1.07 to 1.11 since I purchased the ETF's.

Thanks

Scratch that I'm an idiot. The quote above would indicate a strengthening euro.

dRNk SAnTA

Jairus wrote: »

Scratch that I'm an idiot. The quote above would indicate a strengthening euro.

That's right, the Euro gained on the US Dollar so your account value (in euros) took a negative hit.

irish_investr

Hi all,
Interesting post. Illustrates the importance of considering currency exposure when investing abroad. Just wanted to point out though, that although the portfolio in this thread is showing a negative return, we also need to value the diversification aspect of a multi-currency portfolio. Using foreign stocks/ETFs diversifies not just equity but also currency exposure, for good or for bad. This diversification OVER TIME likely reduces risk and boosts risk-adjusted performance, though for short term investments it may not be optimal. Fidelity recommends US investors to invest 30% "abroad" in order to gain the best "diversification".
Cheers!

gavmcg92

It think the problem with dealing with the currency risk is that the taxation system here would penalise you for hedging as you would have to invest in Irish/EU domiciled funds. Am I correct or is there another way of hedging your currency risk?

irish_investr

gavmcg92 wrote: »

It think the problem with dealing with the currency risk is that the taxation system here would penalise you for hedging as you would have to invest in Irish/EU domiciled funds. Am I correct or is there another way of hedging your currency risk?

You could take a long or short position in one of the currencies to "even things out", but this costs money and ties up capital. Alternatively, a leveraged position - not recommended unless you spent a few years in a trading room. Thirdly, at least in the US, there are several ETFs  which are hedged - the bedge is built in to the fund. For example ticker: NYSEARCA:HEDJ (search google finance). In the case of US listed funds, they are naturally usually hedged to dollar. For EURO hedged funds, well, I'm not aware of any ETF's, but a search on Morningstar brings up some mutual fund hits. Naturally, the hedge being built-in has its costs - no info on what kind of numbers we're talking about, though.