The S&P 500 had a great year for foreign investors.

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Rick Ferri
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The S&P 500 had a great year for foreign investors.

Post by Rick Ferri » Wed Jan 06, 2016 10:27 pm

US investors saw slight gains from the total return of the S&P 500 last year, but Canadians realized over 21% due to currencies changes. Craig Lazzara, Global Head of Index Investment Strategy at S&P Dow Jones Indices provides the data: The S&P 500’s Flat Year

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Re: The S&P 500 had a great year for foreign investors.

Post by nisiprius » Wed Jan 06, 2016 10:44 pm

This underlines the fact that currency movements are not some negligible, technical, academic detail; they have big real-world effects.

An international stock fund is not a pure stock investment; it's a combination stock and FOREX investment.

I realize that I sort of overdo the Morningstar thing, but I do find it to be an astonishingly powerful tool:

Image
Last edited by nisiprius on Thu Jan 07, 2016 7:05 pm, edited 1 time in total.
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Re: The S&P 500 had a great year for foreign investors.

Post by TradingPlaces » Wed Jan 06, 2016 10:48 pm

[OT comment removed by admin LadyGeek]

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Re: The S&P 500 had a great year for foreign investors.

Post by jjface » Wed Jan 06, 2016 11:06 pm

This has nothing to do with the S&P500. You would have achieved similar gains just leaving it in a US dollar bank account.

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Re: The S&P 500 had a great year for foreign investors.

Post by Rick Ferri » Thu Jan 07, 2016 8:20 pm

jjface wrote:This has nothing to do with the S&P500. You would have achieved similar gains just leaving it in a US dollar bank account.
Yes, that is quite obvious. But US investors jump for joy over good foreign stock returns even when the return is due only to a weak US dollar. Currency diversification helps sometimes. Money is money.

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Re: The S&P 500 had a great year for foreign investors.

Post by arcticpineapplecorp. » Thu Jan 07, 2016 9:25 pm

nisiprius wrote:This underlines the fact that currency movements are not some negligible, technical, academic detail; they have big real-world effects.

An international stock fund is not a pure stock investment; it's a combination stock and FOREX investment.

I realize that I sort of overdo the Morningstar thing, but I do find it to be an astonishingly powerful tool:

Image
Thanks Nisi, I had no idea you could look at the performance differences attributed to different currencies at Morningstar. I agree Morningstar's site is powerful and now I have one more reason to respect it. Thanks for showing that. I learned something new.
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Re: The S&P 500 had a great year for foreign investors.

Post by tarheel » Fri Jan 08, 2016 6:16 am

Very interesting guys....taught me something there. I put this in the same category as avoiding bond funds because of the lack of movement in bond prices instead of considering total return (something else I used to do!). Here's to more excellent posts in 2016 from Rick!

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Re: The S&P 500 had a great year for foreign investors.

Post by abuss368 » Fri Jan 08, 2016 4:10 pm

Sad but true Rick!

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Re: The S&P 500 had a great year for foreign investors.

Post by abuss368 » Fri Jan 08, 2016 4:11 pm

Jack Bogle's Two Fund Portfolio of Total Stock and Total Bond?
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Re: The S&P 500 had a great year for foreign investors.

Post by mrwalken » Fri Jan 08, 2016 4:23 pm

Total International was also a pretty good investment for both Canadians and Mexicans.

By contrast, 2015 was a pretty good year for Americans to vacation to Canada or Mexico. 8-)

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Re: The S&P 500 had a great year for foreign investors.

Post by lack_ey » Fri Jan 08, 2016 4:26 pm

abuss368 wrote:Jack Bogle's Two Fund Portfolio of Total Stock and Total Bond?
What is this question asking? You see the same currency effect for any USD asset. Both total US stock and total US bond would be way up in CAD terms by the same amount (relative to underlying asset class local-currency performance) for the same reason. Does that answer the question?

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Re: The S&P 500 had a great year for foreign investors.

Post by asset_chaos » Fri Jan 08, 2016 4:30 pm

Indeed, in my and my spouse's Australian superannuation funds the past year domestic stock and bond returns were respectively somewhat below and somewhat above zero, but the world ex Australia stocks were up over 10%. Suppressing returns here, boosting returns there, currency fluctuations can be ever so interesting when one has interests is different parts of the world.
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Re: The S&P 500 had a great year for foreign investors.

Post by msi » Fri Jan 08, 2016 4:36 pm

Rick Ferri wrote:
jjface wrote:This has nothing to do with the S&P500. You would have achieved similar gains just leaving it in a US dollar bank account.
Yes, that is quite obvious. But US investors jump for joy over good foreign stock returns even when the return is due only to a weak US dollar. Currency diversification helps sometimes. Money is money.

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Do you ever use currency-hedged ETFs in client portfolios, Rick? Stuff like HEMA/DBAW/etc.

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Re: The S&P 500 had a great year for foreign investors.

Post by Random Musings » Fri Jan 08, 2016 4:55 pm

But if one is a long-term investor and rebalances, does not the currency fluctuations negate over the long-term if the assumption is made that RTM occurs between the major currencies? I guess the volatility in the currency which rolls into part of the returns for a period ends up being part of the rebalacing bonus.

Yeah, I know it matters where you start in the process and where one ends....

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Re: The S&P 500 had a great year for foreign investors.

Post by 6miths » Fri Jan 08, 2016 6:55 pm

Yes has been a very good year to be a Canadian without a home bias and who doesn't hedge currencies. The question becomes though when do you 'rebalance' back into one's home currency. I got lucky and gambited a big chunk of change when the dollar was at 1.05, now close to 0.70 it is probably reasonable to consolidate some gains and wait for the CAD to recover to repeat the process. Was fortunate enough to being paid in USD from 2001-2004 - the last time the CAD was so anemic. Sometimes the breaks just go your way... in my experience these seem to balance out.
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Re: The S&P 500 had a great year for foreign investors.

Post by jjface » Sat Jan 09, 2016 3:32 am

Rick Ferri wrote:
jjface wrote:This has nothing to do with the S&P500. You would have achieved similar gains just leaving it in a US dollar bank account.
Yes, that is quite obvious. But US investors jump for joy over good foreign stock returns even when the return is due only to a weak US dollar. Currency diversification helps sometimes. Money is money.

Rick Ferri
Does that not then raise a question mark on whether international stocks should have a prominent place in a core portfolio? Certainly they have a place from a diversification perspective but the added currency risks can be significant and as you point out are often misunderstood. US based investors are feeling it right now.

Thanks for all you great input - I've certainly learned a lot from you and did not mean to sound so gruff. Sorry!

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Re: The S&P 500 had a great year for foreign investors.

Post by ofcmetz » Sat Jan 09, 2016 5:11 am

mrwalken wrote:Total International was also a pretty good investment for both Canadians and Mexicans.

By contrast, 2015 was a pretty good year for Americans to vacation to Canada or Mexico. 8-)

I like your thinking. If you can get good returns due to a strong dollar then go spend that strong dollar somewhere else. :sharebeer
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Re: The S&P 500 had a great year for foreign investors.

Post by Rysto » Sat Jan 09, 2016 8:17 pm

jjface wrote:Does that not then raise a question mark on whether international stocks should have a prominent place in a core portfolio? Certainly they have a place from a diversification perspective but the added currency risks can be significant and as you point out are often misunderstood. US based investors are feeling it right now.

Thanks for all you great input - I've certainly learned a lot from you and did not mean to sound so gruff. Sorry!
Currency risks work both ways. There is no reason why the US dollar could not undergo a similar decline. Then the US-only investor takes a huge hit. You can try and argue that you could just buy local and not worry about the exchange rate, but the local businesses that you want to buy from will be able to make significantly more USD by exporting, so directly or indirectly, you will feel the cost of the exchange rate going down.

At least when you invest both domestically and internationally, the exchange rate changes should even each other out.

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Re: The S&P 500 had a great year for foreign investors.

Post by sawhorse » Sun Jan 10, 2016 10:57 pm

Is there a way for US-based citizens of another country to benefit from this as a hedging method? I can't think of anything specific. My husband is from a Eurozone country, so we have the opportunity to invest from there using Euros.

I'm only asking about theoretical strategies, ignoring questions of legality and taxes. We'll research those if the time comes.

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Re: The S&P 500 had a great year for foreign investors.

Post by Tristan » Mon Jan 11, 2016 8:16 am

I'm a Canadian, and this year has been good reminder of the importance of being globally diversified. In 2015 VCN (Vanguard FTSE Canada All Cap Index ETF) was down 8.7%, and VXC (Vanguard FTSE Global All Cap ex Canada ETF) was up 17%. So using a commonly recommend asset allocation for equities of 1/3 Canada (a significant home bias as Canada's market cap is only 4%) and 2/3 World ex Canada returned 8.5%.

This year was a wake up call for those Canadian investors who felt that owning a handful of only Canadian blue chip dividend stocks "that consistently raise their dividends" is being adequately diversified.

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Re: The S&P 500 had a great year for foreign investors.

Post by longinvest » Mon Jan 11, 2016 9:22 am

Tristan wrote:I'm a Canadian, and this year has been good reminder of the importance of being globally diversified. In 2015 VCN (Vanguard FTSE Canada All Cap Index ETF) was down 8.7%, and VXC (Vanguard FTSE Global All Cap ex Canada ETF) was up 17%. So using a commonly recommend asset allocation for equities of 1/3 Canada (a significant home bias as Canada's market cap is only 4%) and 2/3 World ex Canada returned 8.5%.

This year was a wake up call for those Canadian investors who felt that owning a handful of only Canadian blue chip dividend stocks "that consistently raise their dividends" is being adequately diversified.
I'm Canadian, too.

What I have learned from 2015 returns, domestic -- Canada (VCN) -8.7% and international -- ex Canada (VXC) +17.0%, is that currency risk is significant for international investments.

Canadians were lucky, in 2015, as currency boosted their international investment returns by almost +20%. This gives us an idea of the extent of currency volatility. Currency could have had the reverse movement and caused a penalty of almost -20% to international investment returns.

Note that Canadian inflation did not shoot up by 20%; "core inflation" stayed the course at approximately 2%, which is the official target of our Central bank (it's an explicit objective of its monetary policy to keep inflation within a range of 1% to 3% with a 2% target).

We often see calls for a market-weight allocation to international stocks. That would mean a 97% allocation to international and a 3% allocation to domestic, for stocks within a portfolio*. Had currency moved in the other direction, such a portfolio would have suffered significant short-term losses due to violent currency movements. I think that such a recommendation is out of line, at least when suggesting the use of index ETFs without a currency hedge. Unfortunately, currency hedges carry their own additional costs (and tracking problems).

* Source of weightings: Vanguard Canada Portfolio Strategies -- https://www.vanguardcanada.ca/advisors/ ... tegies.htm.

As a consequence, I think that having a home bias is not a bad thing, in a portfolio. One should diversify a portfolio using international stocks, without currency hedging to also diversify currency exposure, but I do not think that going with a market-weight allocation to international (97% of stocks) is sensible for Canadians. I also think that currency diversification has no place within the bond allocation**; a pure 100% allocation to domestic and 0% to international, for bonds, is justifiable. Our investment-grade bond market is healthy and our government bonds are safe (high credit quality).

** One could consider the use of currency-hedged international bonds, but as I wrote earlier, currency hedges have their own additional costs (and tracking problems).
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