Portfolio strategy to hedge against currency fluctuation EUR/USD

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investisseur
Posts: 2
Joined: Sat May 01, 2021 11:33 am
Location: US

Portfolio strategy to hedge against currency fluctuation EUR/USD

Post by investisseur »

What is your strategy with a portfolio of US ETF to hedge against long term currency fluctuation EUR/USD:

• Do nothing because a globally diversified portfolio of ETFs already contains bonds & stocks that represent the European market. Any EUR/USD fluctuation is partially compensated.
• Balance the portfolio with more US ETF with European stock and bonds.
• Balance the portfolio with more US ETF with European bonds only.
• Use futures to hedge. Least preferred since this is not very passive.
• Any other suggestion?

Background: I am a European citizen currently living in the US and I am a US resident for tax purposes. On the long term, I will go back to Europe and I will need euros while my investment are in US ETF.

My understanding is that I can only invest in ETF denominated in USD, otherwise I am expose to PFIC tax penalty and additional tax complexities.
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sunnywindy
Posts: 655
Joined: Sat Jan 18, 2014 3:42 pm
Location: Central California

Re: Portfolio strategy to hedge against currency fluctuation EUR/USD

Post by sunnywindy »

I can't speak to the particulars of your financial situation, but on a long-term basis, hedging equity is a losing strategy mostly because it drives up costs (hedged funds ER's are usually significantly higher) and that takes away from long-term performance. It's also very easy to understand why long-term hedging does not work either: the gains you make hedging are then always lost when the currency relationship turns the other way.

Hedging bonds will reduce volatility and this is a good strategy if you own bonds to reduce portfolio volatility.
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456M
Posts: 144
Joined: Tue Mar 23, 2021 11:40 am

Re: Portfolio strategy to hedge against currency fluctuation EUR/USD

Post by 456M »

To preface, I'm a foreign investor (not Euro) and I'm currently invested in US-domiciled ETFs in USD currency. The allocation of my current portfolio is about 50% US equities in USD, 25% in local real estate and 25% in a local co-op share fund in local currency at a fixed 2% interest rate (think of this as basically a substitute for low interest bonds).

If this discussion is purely about currency fluctuations then I'm not worried at all. The fluctuations of value between my local currency and USD have been within maybe ~15% since 2007 (The relevant data only goes this far, more on why below). Some years it's above, other years it's below. In the end it's not a persistent increase/decrease. Assuming that is the case for EURO/USD then I don't see any reason to hedge.

If the discussion is more about longterm USD inflation, then I've given some thought about how to hedge against my US holdings and as of now I'm in the "do nothing" camp, and for several reasons.

1) I have yet to figure out a method of hedging that is also not going to cost me in the long term (let alone any guarantees of it being viable).
2) I'm a noob investor. I know nothing. In fact me being far removed from the US, I'd say I know less than nothing. There are WAY too many variables and unknowns for me to even consider claiming that concerning levels of USD inflation are on the horizon. I know less than squat about monetary policy, M1, M2, inflation expectations, Fed interest rate policy, etc.
3) Even more so, I know less than nothing about the relationship between the USD and my local currency. Since 2007, the value of my local currency has been pegged to an undisclosed basket of currencies (one of which I'm absolutely sure is USD). How would that affect the local currency if the USD is inflated? I don't know.
4) My local currency is very stable. However, with that said, I've had discussions with several people recently who know a whole lot more than I do about the local economy, and was recommended to consider keeping some $$ in USD as a hedge against possible local currency inflation! As soon as I heard them say that I was laughing out loud at the thought. If I took away anything from my discussion with them it was that, much like the stock market, no one knows anything.
5) My USD holdings are all in equities. Some would argue that assets such as stocks would be a somewhat reasonable hedge against inflation. Will that be the case? I also don't know.
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