Currency risk when you invest across the Atlantic

Currency Risk When You Invest Across the Atlantic

If you live in the eurozone and buy a US equity ETF, you have made two bets, not one. The first is that American companies will earn more. The second is that the dollar will not weaken against the euro while you hold them. Only the first bet gets discussed in the product brochure.

Currency risk is the part of a foreign investment's return that has nothing to do with the asset. A US index can rise 7% in dollars and leave a euro investor with less money than he started with. That is not a market failure or a fee problem. It is the exchange rate doing exactly what exchange rates do — and it is the one risk in the portfolio that shows up as a currency rather than as a company.

The same fund, three different outcomes

Take $10,000 invested in a US equity index fund, earning exactly 7% a year in dollars for three years. In dollars, the position grows to $12,250. That part is arithmetic and it does not change.

What changes is what those dollars are worth when you convert them back. At 1.05 dollars per euro — roughly where the pair sat in autumn 2022 — the position starts at €9,524. Three years later, with the dollar amount up 22.5%, the euro value depends entirely on the rate.

Read the top line again. The fund gained 22.5% in its own currency and the euro investor lost 14% of the original stake. Nobody made a bad stock pick and no fee explains it.