Currency Risk for International Investors: How Exchange Rates Affect Your ETFs

If your salary and spending are in euros, pounds or dirhams, but you invest in a global or US stock fund, your result depends on two things: how the investments perform, and how the exchange rate moves. Over a long investing life, the second can be surprisingly large — in either direction.

This guide explains where currency risk really comes from, how much it can matter, what hedging does, and how to keep conversion costs down.

Where currency exposure comes from

A common misunderstanding is that the currency an ETF trades in determines your currency risk. It doesn't.

VWRA trades in US dollars in London. VWCE trades in euros on Xetra. They are the same fund, holding the same thousands of global companies — most of them priced in US dollars. Buying the euro listing doesn't remove your dollar exposure; the price in euros simply moves with the exchange rate.

Your currency exposure comes from what the fund holds. For global and US stock funds, that's mostly the US dollar. The trading currency mainly affects how much you pay to convert money when you buy.

How currency moves change your return

Roughly, your return in your own currency is the fund's return plus the change in the fund's currency against yours:

• If the dollar strengthens against your currency, your dollar-based investments are worth more in your money.
• If the dollar weakens, they're worth less.

Here's an illustration in euros: €10,000 plus €500 a month for 20 years into a global fund returning 7% a year in dollars (after a 0.14% fee), paying 0.5% to convert each time:

Same fund, same contributions. A drift of just 1% a year either way moves the result by tens of thousands. Nobody can predict which way currencies will move over 20 years.

Does currency risk even out?

Over very long periods, currency moves have sometimes partly reversed — but there's no guarantee, and the swings within those periods can be large. Some points worth knowing:

• Global funds spread exposure across many currencies, not just the dollar, which can soften the effect.
• Companies themselves are global. A US company earning much of its revenue abroad isn't purely a "dollar" investment.
• Your spending matters. If you'll eventually spend the money in euros, euro value is what counts.

The dirham peg

The UAE dirham has been pegged to the US dollar for decades. For AED-based investors, dollar-based funds carry little exchange-rate risk as long as the peg holds — conversion costs are the main currency cost. Several other Gulf currencies are also pegged to the dollar.

What currency hedging does

A currency-hedged share class uses financial contracts to cancel most of the exchange-rate effect, so your return is close to the fund's return in your own currency.

Pros: removes most of the currency swing, so results are more predictable.

Cons: a small extra cost each year, and you give up the gains when the foreign currency strengthens.

Hedging is most common for bond funds, because currency swings can be larger than a bond fund's whole return. AGGH, for example, is a currency-hedged global bond fund. For long-term stock investing, many investors accept currency risk unhedged.

Conversion costs: the certain part

Unlike currency moves, conversion costs are guaranteed. In the euro example above, a 0.5% cost on every monthly purchase and on the final conversion adds up to about €2,119 over 20 years — plus the growth that money would have earned.

Ways to cut them:

• Compare brokers' FX fees. They vary widely, from very cheap to over 1%.
• Buy a listing in your own currency if it's offered cheaply — remembering it doesn't change your exposure.
• Convert less often if your broker charges a fixed fee per conversion, by investing larger amounts less frequently.
• Hold a multi-currency account if your broker offers one, so you control when you convert.

Currency exposure of common fund types

Approximate, and changing over time as markets move:

Even a "global" fund is mostly a dollar fund, simply because US companies make up the largest share of global stock markets.

A practical way to handle currency in your plan

1. Decide which currency your goal is in. If you'll spend the money in euros, measure progress in euros.
2. Accept currency risk on stocks if your horizon is long and the fund is broadly diversified — or consider partial hedging if the swings would worry you.
3. Consider hedged bonds for the safer part of your portfolio, so it actually stays steady in your currency.
4. Choose the cheapest way to convert. Compare your broker's FX rates, and use a listing in your own currency only if it's genuinely cheaper.
5. Plan with a range. Run the Currency Impact Calculator with both a stronger and a weaker dollar, and make sure your plan works in either case.

Should you invest in your home market instead?

Some investors overweight their home country to reduce currency risk. That trades currency risk for concentration risk — your job, home and investments all tied to one economy. For most people, a globally diversified portfolio with some currency exposure is the more balanced choice. See building a simple long-term portfolio.

How to think about it

1. Know what you hold. A global stock fund is mostly dollar exposure, whatever currency it trades in.
2. Accept some uncertainty. Over decades, currencies can move a lot either way.
3. Consider hedging for bonds, where currency swings dominate.
4. Minimise conversion costs, which are certain.
5. Test scenarios with the Currency Impact Calculator.

The bottom line

For investors outside the US, currency is a real part of long-term returns. It comes from what a fund holds, not where it trades. You can't control exchange rates, but you can understand your exposure, decide whether hedging makes sense for parts of your portfolio, and keep conversion costs low.