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Multi-Currency Investing: A Complete Guide

The currency your fund is priced in is not your currency exposure. How to find your real exposure, when hedging is worth it, and what it actually costs.
Multi-Currency Investing: A Complete Guide
Your world ETF is priced in euros, so you have no currency risk. That is the most common wrong belief in European investing, and it is wrong by about two thirds.
Own anything outside your own country and you hold two positions, not one: the asset, and the currency it lives in. The trouble is that the currency you are exposed to is usually not the one on the ticker, which is why so many people are certain they have no currency risk while carrying a great deal of it.
Built for every reader. One worked example in euros. The hedging section describes what the research finds and what practitioners commonly do, not what you should do.

You Have Two Returns, Not One

Buy a US company from a euro account and your outcome depends on two independent things:

  • The asset's return in its own currency. What the share price did in dollars.
  • The currency's move against yours. What the dollar did against the euro.

They combine into the only number that matters to you, which is what your holding is worth in the currency you actually spend. Either can be positive while the other is negative. A US position can rise 8% in dollars and leave you flat in euros.

Our article on currency gain covers measuring the two separately after the fact. This one is about knowing what you are exposed to in the first place.

The Pricing Currency Is Not the Exposure

Here is the correction that does most of the work.

A fund priced in euros is quoted in euros. That says nothing about what it holds. A world equity fund holds mostly US companies whose earnings, share prices and dividends are all in dollars. Wrapping that in a euro-denominated share class changes the label on the price, not the underlying exposure.

A Worked Example

You hold EUR 10,000 in a euro-priced world tracker, and roughly 65% of what it holds is US companies. The dollar falls 10% against the euro. Every share price stays exactly where it was.

US-exposed portion:  10,000 x 65%  = EUR 6,500
Effect of a 10% fall in the dollar: EUR 650 lost
As a share of your portfolio:       6.5%

You are down EUR 650 and nothing you own moved in price. The euro ticker did not protect you, because it was never a hedge. It was a denomination.

This is the single most common misconception in retail multi-currency investing, and it is worth being blunt about. Unless a fund explicitly says it is currency hedged, the euro or pound on the front is a unit of account. Your exposure is whatever the fund holds.

How to Find Your Actual Exposure

Look through to what the fund owns, not at what it is priced in. Every fund publishes a factsheet with a geographic or currency breakdown, usually on the first page, and that breakdown is your exposure.

Two practical notes. A world index is more concentrated in the US than most people expect, so "globally diversified" and "mostly dollar exposed" are frequently the same portfolio. And a company's listing country is not always where its earnings come from: a European multinational selling worldwide carries dollar exposure that no geographic breakdown will show you.

Perfect precision is not available here and is not needed. Knowing whether you are 20% or 70% exposed to the dollar is enough to make every decision that follows.

Hedged or Unhedged

Currency hedged share classes exist to strip the currency move out and leave you with the asset's return in its own currency. Whether that is worth doing splits sharply by asset class, and the split is the most useful thing in this article.

Equities

Over long horizons, currency moves are small next to equity moves. A stock market can return 200% over a decade while the currency moves 20%, so the currency is a secondary effect on a long-term equity holding. Most long-term equity investors leave it unhedged, and the research generally supports treating the decision as a minor one.

Bonds

The picture inverts. Bonds are lower-volatility assets, so a currency move can be larger than the entire return you were expecting. UBS puts it directly: in fixed income, FX can dominate volatility, and hedging brings the risk closer to the underlying bond exposure (UBS, understanding currency hedging).

That is why hedged share classes are far more common and far more used in fixed income than in equities.

What Hedging Costs

Not a fixed fee, which is where most retail explanations go wrong.

The cost or benefit of hedging is driven by the interest rate differential between the two currencies, the cost of carry, rather than by a set charge (UBS). When your currency's rates are higher than the foreign one's, hedging can actually add to your return. When they are lower, it subtracts.

So "hedging costs about 1% a year" is not a fact about hedging. It is a snapshot of one interest rate gap at one moment, and it moves.

The rough shape most practitioners settle on: hedge bonds, do not bother hedging long-term equities, and stop worrying about it. That is a description of common practice rather than a recommendation, and reasonable people vary it.

Your Base Currency Should Be the One You Spend

Your base currency is the one you measure everything in. It should be the currency of your future expenses, not the currency of your assets or your birth.

If you live and will retire in the eurozone, euros are your yardstick, and a portfolio that has done wonderfully in dollars but poorly in euros has done poorly. If you are likely to move countries, this is worth thinking about early, because it changes which exposures count as risk and which count as matching.

What Currency Does to Your Allocation

Currency does not only change your return. It changes your weights.

If the dollar strengthens, your US holdings become a larger share of your portfolio without you buying anything, and your allocation drifts toward an exposure you did not choose. Our article on portfolio drift works through an example where a 10% currency move shifts an equity weight by 1.2 percentage points on its own.

The consequence: if you rebalance, you are partly rebalancing currency exposure whether or not you meant to.

What Breaks in Tracking

Three things go wrong once a portfolio spans currencies, and all three are quiet.

The conversion date. A purchase converted at today's rate rather than the trade date's rate produces a cost basis that was never true. Every downstream figure inherits the error.

Which rate. Brokers convert at their own rate with a margin inside it, so two brokers can show different home-currency values for identical holdings.

The two effects get merged. If the asset's return and the currency's move are added together into one number, you cannot tell a good investment in a falling currency from a bad one in a rising currency. They demand different responses.

How Turbobulls Handles This

Holdings are tracked in their own currency and reported in your base currency, across 30+ currencies, with the exchange rate applied on the trade date rather than today's. That is the fix for the first problem above, and it is the one that quietly corrupts spreadsheets.

Returns can be separated into their capital gain and currency gain components, so a US holding that rose in dollars and fell in euros reads as exactly that rather than as one confusing number. That split sits on the paid plan.

Allocation by currency is available on every plan including free, alongside asset type, broker and tag, so you can see how your portfolio distributes across currencies without upgrading.

An honest limit, and it matters for this article in particular. Turbobulls places a holding by the instrument, so a fund counts where the fund itself is domiciled, not across the countries it holds. There is no look-through to a fund's underlying positions. The exercise described above, reading your factsheet to find your real exposure, is one you do yourself; the product will show you the currency your holdings are denominated in, not the currencies their contents are exposed to.

See Both Halves of Your Return

Holdings tracked in their own currency, converted on the trade date, with the currency effect separable from the asset's own performance.
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The Full Picture: Read These Next

Quick Links

Currency gain - measuring the effect after the fact

Portfolio drift - how currency moves your allocation

Index funds vs ETFs - domicile, and the withholding tax inside a fund

Capital gains basics - why a currency gain can be taxable

Frequently Asked Questions

Q: Should I hedge my currency exposure?

The research splits it by asset class rather than giving one answer. For long-term equity holdings the currency effect is small next to the equity effect and most investors leave it alone. For bonds the currency move can dominate the return, which is why hedged bond funds are common. Your own answer also depends on when you will spend the money and in what currency.

Q: Does a EUR-priced ETF protect me from the dollar?

No, unless it explicitly says it is currency hedged. Pricing and hedging are different things. A euro-priced fund holding US companies gives you dollar exposure with a euro label on the front, which is the misconception this article exists to correct.

Q: What base currency should I use?

The one you will spend. For most people that is where they live and expect to retire, since that is the currency your future costs are denominated in. Measuring a portfolio in a currency you will never spend produces returns that look fine and do not tell you whether you can afford anything.

Q: Do I pay tax on currency gains?

Potentially, and this surprises people. In several systems the gain is computed in your own currency, so an asset that was flat in its own currency can produce a taxable gain purely because the exchange rate moved. Treatment varies by country; see capital gains basics for how the mechanism works and check your own rules.

Turbobulls is a tracking and analytics tool, not an investment adviser. Nothing here is investment, tax, or legal advice. Investing involves risk, including loss of principal. Do your own research or consult a licensed professional.

Two Returns, Told Apart

Turbobulls converts every transaction at its trade-date rate and can separate what the asset did from what the currency did, across 30+ currencies.

  • 30+ currencies with FX applied on the trade date
  • Capital gain separated from currency gain on the paid plan
  • Allocation by currency on every plan, including free
  • Multi-broker and multi-account in one base currency
  • Export on every plan, never paywalled
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