ETF essentials · 2 minute read
Currency exposure: does buying in euros remove currency risk?
The short answer
No. The currency in which an ETF trades is not necessarily the currency of the investments it owns.
Why it matters
An ETF may be bought and sold in euros while holding companies whose shares are priced in US dollars, pounds or other currencies.
There are several different currency terms:
- Trading currency: the currency used to buy and sell the ETF on an exchange
- Fund currency: the currency used for the ETF’s accounting and reporting
- Underlying currency exposure: the currencies of the assets held by the ETF
- Currency hedging: an attempt to reduce the effect of exchange-rate movements
The trading currency does not by itself remove exposure to movements in foreign currencies.
A simple example
Suppose you buy a global ETF in euros. The ETF owns US shares, and the US dollar strengthens against the euro. That currency movement may increase the euro value of those holdings. If the dollar weakens, it may reduce their euro value.
A euro-hedged version may use financial contracts to reduce this currency effect. Hedging has costs and may not remove currency movements completely.
Does the same principle apply to a gold ETC?
Yes. Buying an unhedged gold ETC in euros does not remove exchange-rate effects.
If its gold benchmark is quoted in US dollars, your euro return reflects both the gold-price movement and the dollar–euro exchange rate. Gold could be unchanged in dollars while your investment rises or falls in euros.
A euro-hedged product aims to reduce that currency effect. Check the hedging label and costs; the currency used to buy the security is not enough.
What to check
- Which currencies do the underlying investments use?
- Is the ETF hedged or unhedged?
- If hedged, is the hedge monthly or managed differently?
- Is the trading currency being confused with the underlying exposure?
Check the exact share class and hedging label on the factsheet before interpreting its currency exposure.
Key term explained
Currency exposure is the effect that changes in exchange rates can have on the value of an investment.
Currency movements can help or hurt returns. They are an additional source of risk, not automatically a reason to avoid an ETF.