Question re: Index ETFs and currency exchange

[Eomer]

So I bought in to the whole index investing thing hook, line and sinker. I decided to go with the following ETF's at roughly the following mixtures:

XIC - 25% - iShares TSX index, traded in CDN on the TSX
VTI - 30% - Vanguard US Total Market, USD on the Dow
VWO - 10% - Vanguard Emerging Markets, USD
VPL - 10% - Vanguard Pacific Markets, USD
VGK - 25% - Vanguard European Markets, USD

So obviously the 1/4 of my money in the TSX index is more or less immune to exchange rates since my account is in Canadian funds.

For VTI, that's fairly easy to understand. If the Canadian dollar goes up, as it has recently, my holdings go down in value in Canadian funds provided the ETF unit cost remains the same in USD.

But how does it work for the other ETFs? They're traded and priced in American dollars, but if the Euro skyrockets against the USD, does the USD/unit price also increase in lockstep?

Put another way, if the Euro and Loonie remain the same relative to each other while rising or dropping significantly against the USD, the value in CDN of the investment would remain the same, would it not? (the price of units would change on the Dow, but that would be offset by the currency conversion from USD > CDN) Just trying to bend my mind around this, as the Loonie has been all over the fucking place for the past couple years, and if 75% of my investments are exposed to currency exchange rates, I want to make sure I have a good handle on the implications.

[prescient63]

Let's assume EUR:CAD trade at a 1:1 ratio and you buy a $1,000 of an ETF which contains underlying securities that are all denominated in the EUR.

Let's assume the market moves and the new ratio is 1:1.15. Your investment would now be worth 1000*1.15 = 1150

Though you could convert through USD there is no point to it because every spot rate you get for the most part is based off of the 3 majors (EUR, GBF, USD) and then for any cross currency conversions they tend to just convert through USD to give you a spot rate as it's the most liquid and agencies like WM/Reuters use contributed data.

Edit: Screwed it up when I first explained it.

[prescient63]

Originally Posted by Eomer

But how does it work for the other ETFs? They're traded and priced in American dollars, but if the Euro skyrockets against the USD, does the USD/unit price also increase in lockstep?

Put another way, if the Euro and Loonie remain the same relative to each other while rising or dropping significantly against the USD, the value in CDN of the investment would remain the same, would it not? (the price of units would change on the Dow, but that would be offset by the currency conversion from USD > CDN) Just trying to bend my mind around this, as the Loonie has been all over the fucking place for the past couple years, and if 75% of my investments are exposed to currency exchange rates, I want to make sure I have a good handle on the implications.

If the Euro appreciates against the US Dollar and the loonie moves in lock step with the EURO the you would have more dollars, but that wouldnt translate into more CAD because you have to exchange EUR to USD (you'll get alot of USD), but then you will have to exchange USD for CAD and it will cost alot of USD to buy CAD.

So EUR:USD trade at a 1:1 ratio, and USD:CAD trade at a 1:1 ratio when you buy your 1000 investment. A month later EUR:USD trade at a 1:1.2 ratio and USD:CAD trade at a 1:0.8 ratio.

So we have our original investment of 1,000 EUR is now worth $1,200 because every EUR buys 1.2 USD and then every dollar buys 0.8 CAD so 1,200 * .8 = 960 CAD

[Soriak]

Have you looked into the Vanguard Global Stock Index Fund? Seems like you could replace all those ETFs with a single one and get about the same distribution - or a more accurate one even. You probably shouldn't favor one region over another, since the premise of index investing is that we can't know in advance which region or sector will perform better.

Also, have you looked into a bond index fund? I'm not sure what the current thinking on bonds is, but one may even question the notion that stocks will outperform bonds. Diversification over asset classes is probably a good idea in any case. (I say that while being 100% in stocks myself... at least right now. Do as I say, not as I do? )

edit: Is there even a global long-term bond index fund? Vanguard has one for US companies, but not one that is globally diversified. Why?

[prescient63]

These guys know their shit Fixed Income - IndexUniverse.com - News, data and research on ETFs, indexes and index funds

Bond ETFs are good for exposure but people worry about mispricing since they are harder to arbitrage and and their holdings tend to reflect only a sample of the index they are trying to recreate. If you are looking to buy into bond etf's I would stay w/ iShares / State Street funds for liquidity reasons. They also tend to have bigger fund baskets which allows you greater diversification. A fund like HYG has 238 securities in it whereas something like JNK has 141 securities. You'll be getting a better representation of the underlying index with HYG.

If you ever have questions regarding ETFs feel free to PM me. I work with them on a daily basis.

As for interesting new funds I would look at CEW which is a multicurrency basket and ALT which launches tomorrow and is a futures / currency short/long basket.

[Aetos]

I am considering just dumping $500/week into an s&p 500 index for the next 20 weeks or so. Not looking too longterm, just a place to hold money for the next 4-6 months.

[Lyenae]

Originally Posted by Aetos

I am considering just dumping $500/week into an s&p 500 index for the next 20 weeks or so. Not looking too longterm, just a place to hold money for the next 4-6 months.

Do you know what Dow theory is?

[Soriak]

Originally Posted by Aetos

I am considering just dumping $500/week into an s&p 500 index for the next 20 weeks or so. Not looking too longterm, just a place to hold money for the next 4-6 months.

Don't invest in stocks for such a short period of time. Best to just stick with a savings account for this time frame - I don't think short term CDs would be worth it. If you get an extra 1%, that's $2.50 over 6 months on $500.

[prescient63]

Originally Posted by Soriak

edit: Is there even a global long-term bond index fund? Vanguard has one for US companies, but not one that is globally diversified. Why?

Global bond funds that I can think of off the top of my head are EMB, BWX, PCY, IGOV, ISHG, and BWZ, but I wouldn't invest in them unless you just want exposure to those markets. I can't think of any global corporate bond funds, but that doesn't mean they don't exist. Some of the ones I just listed might actually have corporates in them as I haven't really taken a look at their constituents.

[splorge]

Originally Posted by Soriak

Have you looked into the Vanguard Global Stock Index Fund? Seems like you could replace all those ETFs with a single one and get about the same distribution - or a more accurate one even. You probably shouldn't favor one region over another, since the premise of index investing is that we can't know in advance which region or sector will perform better.

Also, have you looked into a bond index fund? I'm not sure what the current thinking on bonds is, but one may even question the notion that stocks will outperform bonds. Diversification over asset classes is probably a good idea in any case. (I say that while being 100% in stocks myself... at least right now. Do as I say, not as I do? )

edit: Is there even a global long-term bond index fund? Vanguard has one for US companies, but not one that is globally diversified. Why?

Using ETFS you can sort of gain exposure to different asset classes. Investing in a gold ETF or a property index etf can expose you to the gains/losses of those assets without having to actually purchase them outright. the benefit of the ETF is the liquidity.

[Aetos]

Originally Posted by Soriak

Don't invest in stocks for such a short period of time. Best to just stick with a savings account for this time frame - I don't think short term CDs would be worth it. If you get an extra 1%, that's $2.50 over 6 months on $500.

$500/week for 20 weeks is 10k. My plan was that in the next 6 months, which is more than enough time to own stocks, was that the market would be higher, not lower as a whole

[Soriak]

I'd still stay away from stocks for only 6 months. The issue isn't that you're not investing enough, but that the market can be fickle in the short term. This time last year, you would have gotten a terrible ROI:
DJIA:
10/20/08: 9265
04/20/09: 7840

You'd be down -16% over those 6 months. Just hope you wouldn't have to sell at the bottom: 6550 in March. That would have been a loss of roughly 30%.

It's not that you can't be right... maybe you do get a better return. But the downside is just as possible, and if you actually need that money for something you can't afford the risk.

[Aetos]

Originally Posted by Soriak

I'd still stay away from stocks for only 6 months. The issue isn't that you're not investing enough, but that the market can be fickle in the short term. This time last year, you would have gotten a terrible ROI:
DJIA:
10/20/08: 9265
04/20/09: 7840

You'd be down -16% over those 6 months. Just hope you wouldn't have to sell at the bottom: 6550 in March. That would have been a loss of roughly 30%.

It's not that you can't be right... maybe you do get a better return. But the downside is just as possible, and if you actually need that money for something you can't afford the risk.

While I agree with you on that factor. Do not forget that for the same time period the dow was downward trending for many months in the past and the market outlook was not positive. The outlook today is a lot better than it was in the past. Which is why I thought it would be more beneficial to invest. The money isn't for anything important, and the 6 month projection is just more of a guideline, not a requirement.

It doesn't even have to be stocks. I will put it in anything, but I want to minimize my comission cost by putting it into ETf's. S&P etf was my first thought but im open to anything. Precious metals, currencies, futures, I don't care!

[The Ancient]

Soriak is right about 6 months being too short a time period to invest in stocks. Also, ETFs are purchased like stock and have commision fees so dumping $500 a week into one is a terrible idea. If you absolutely MUST invest in stocks, do so in a mutual fund.

[Aetos]

Originally Posted by The Ancient

Soriak is right about 6 months being too short a time period to invest in stocks. Also, ETFs are purchased like stock and have commision fees so dumping $500 a week into one is a terrible idea. If you absolutely MUST invest in stocks, do so in a mutual fund.

I said that it didn't have to be stocks, I said that it could be anything at all, it doesn't matter, weather derivatives for all I care. My only concern is that it is relatively safe.

Mutual funds are not the way to go. I would rather pay $7 per week to buy $500 worth of an ETF than a mutual fund that is loaded with fees, which will be a lot more than $7.