As I lying in hospital this week with a herniated disc, I was kept up one night in particular when I was excited to see my ETF’s value start to rise and rise and rise!
Wow look at that, up 4.82% in just a matter of minutes on Wednesday!
I excitedly told my friends and family how much money I was making and was proud as punch. That was until I got discharged from hospital and actually sat down to work out my monthly rebalancing plan.
It was then I realised that Google finance was giving me a bum steer.
See, what Google finance does is it uses the current exchange rate all the time – meaning that when you purchased your ETF’s it doesn’t care what the exchange rate was at the time. It just uses the current one so it appears that you gains may be wildly inflated. (It may also make it appear any losses are also exaggerated).
So this is what actually happened that day:
It was rising just as fast as the CADUSD rate was dropping! The reason being, the underlying assets are all in USD (S&P500 companies). This is actually amazing in the sense that the market is extremely efficient at picking up the actual value of the assets regardless of the currency.
I’m now looking for a tracking application that keeps in mind your base currency and what the exchange rate was at the time of purchase. If you know of one please let me know. (Yahoo Finance appears to have the same problem).
By the way this is a FAQ about the risk of currencies fluctuating. Definitely there are risks when purchasing stocks that are not in your base currency. But also, with risk there is reward – the currency can also swing in your favour.
One key point is though, it does not matter what the trading currency is. What matters is what currency the underlying assets trade in. For example, the ETF’s I am buying off the Toronto exchange trade in CAD, but the assets are USD based. Therefore what is more important to me is the SGDUSD rate (I am buying CAD with SGD for trading purposes). I am not concerned with the SGDCAD, or CADUSD rates.
Just like water finds its own level, so will your stocks when trading in a different currency as people will be quick to try and take advantage of any currency swings – bringing it quickly back in line to the actual underlying value.