Portfolio Suggestion USD and EURO Hedge

[Khan]

I am an asian investor with no preference of currency.
I am looking to create a different kind of diversified portfolio with USD/EURO currency hedge and without including Emerging Markets and Asia Pacific Markets.

I believe adding too many regions makes a portfolio over diversify which creates more harm than good.

50% VUAA- Vanguard FTSE S&P500 - (USD Base)
50% VWCG- Vanguard FTSE Developed Europe- (EURO Base)

I Will add 20% bonds later.

[alex_686]

First, if you hedge you have to pick a currency to hedge against.

Second, equities are already a excellent natural currency hedge, and as indexes become dominated by multinational corporations they are becoming a better hedge.

[Khan]

Buying S&P500 in USD and Euroxx600 In EURO currency with 50/50 allocation is already considered a hedge.

[Khan]

Duplicate post

[alex_686]

Buying S&P500 in USD and Euroxx600 In EURO currency with 50/50 allocation is already considered a hedge.

What risk are you specifically trying to hedge?

I am not sure I would consider it a hedge. This is kind of my day job so pension is important.

What risk are you trying to hedge? To hedge is to offset one risk with a opposite risk. Historically the currency risk to equities are low and US/EUR risks do not offset each other.

Equity risk on the other hand does do a good job of offsetting currency risk. Equities are a claim on real economic assets. If there is a shock that moves currency, a financial assets, this tends not to affect the value of real assets.

For example, lets say you own a rental property in a foreign country. It has a property value and a income stream. The currency between the HDK and the foreign country shifts by 10%. Does this affect the value of the property or the income stream? No. The economics remain unchanged. Thus the value of the property also shifts by 10% from your viewpoint leaving you in a unchanged position.

[Khan]

I live in a frontier market asian country with a very weak currency. Luckily I have an online income in both Euro & USD.

I am looking to completely avoid over diversification in my portfolio and I believe buying S&P500 in USD and Euro Stoxx 600 in Euro with a 50:50 allocation makes sense. That's what I am calling a hedge.

A question for you.

A USD varient of S&P500 etf and another EURO variant of S&P500 etf will produce exact same returns after liquidation at same time.

[alex_686]

I am looking to completely avoid over diversification in my portfolio and I believe buying S&P500 in USD and Euro Stoxx 600 in Euro with a 50:50 allocation makes sense. That's what I am calling a hedge.

A question for you.

A USD varient of S&P500 etf and another EURO variant of S&P500 etf will produce exact same returns after liquidation at same time.

I am not seeing a question - just a true statement. This is true if you view it from a USD, EUR, or HKD prespective.

So a question back to you. What is over diversification and why are you trying to avoid this?

I work in risk. I am getting the sense from your posts that you are not concerned about a actual specific risk but rather a general free floating anxiety. This is a very common emotion, so no issues there. Just make sure it does not spill over into any behavior or cognitive errors, which are also very common.

[Khan]

How EUR/USD varients of VUAA Etf returns are same?
Source: justetf

S&P500 - EURO Base currency accumulating.


S&P500 - USD Base currency accumulating.



Over diversification means "Diworsification", It does not mitigate drawdown risk. For eg, In 2008 during a market crash S&P500 and Global All Cap equity went -50 drawdown . That's why we use Bonds for equity protection.

The never ending debate on this forum is US vs International stocks. IMO, and according to Vanguard research paper both US and International stocks outperform each other during different periods of time.

DOW30 has 30 Largest companies and S&P500 has 500 largest companies then why both index delivers same returns?

[alex_686]

How EUR/USD varients of VUAA Etf returns are same?
...
Over diversification means "Diworsification", It does not mitigate drawdown risk. For eg, In 2008 during a market crash S&P500 and Global All Cap equity went -50 drawdown . That's why we use Bonds for equity protection.

The never ending debate on this forum is US vs International stocks. IMO, and according to Vanguard research paper both US and International stocks outperform each other during different periods of time.

DOW30 has 30 Largest companies and S&P500 has 500 largest companies then why both index delivers same returns?

Because the returns are not that different. You need to convert the ending EUR value back to USD. Or you need to convert both USD and EUR returns to HKD.

I do need to correct and expand on one thing. I said that equities are a good currency hedge. To be more exact, they add a extra 1% volatility to returns on a inflation adjusted basis. It also means revert thanks to Purchasing Power Parity. So the longer the holdings the lower the risk. After 10 years the volatility dissipates into statical noise.

Diworsification is FUD (Fead, Uncertainty, and Doubt) that active managers throw around. It is a boggie monster to strike fear. It is a marketing term, not a formal term. For context I am a mild advocate of active managers for the right reason. This is not one of them.

[typical.investor]

How EUR/USD varients of VUAA Etf returns are same?
...
Over diversification means "Diworsification", It does not mitigate drawdown risk. For eg, In 2008 during a market crash S&P500 and Global All Cap equity went -50 drawdown . That's why we use Bonds for equity protection.

The never ending debate on this forum is US vs International stocks. IMO, and according to Vanguard research paper both US and International stocks outperform each other during different periods of time.

DOW30 has 30 Largest companies and S&P500 has 500 largest companies then why both index delivers same returns?

Because the returns are not that different. You need to convert the ending EUR value back to USD. Or you need to convert both USD and EUR returns to HKD.

This is correct. Actually, perhaps the best comparison for you is to convert both the EUR fund and the USD fund back to your home currency.

You need to know that your currency exposure is not EUR or USD. It's the exposure of the companies in the funds -- where they earn their revenue and have their expenses.

[TedSwippet]

You need to know that your currency exposure is not EUR or USD. It's the exposure of the companies in the funds -- where they earn their revenue and have their expenses.

... as explained -- and arguably, flogged to death! -- in Non-US investors and ETF currencies. Also, Currency risk for non-US investors on the futility of comparing percentage returns across different currencies.

[Khan]

I got everyone's point.

Home currency is PKR
Income is in USD & EUR
Portfolio is 50% US + 50% Europe equity

Will add bonds later as I am currently 38 and a small rental property in UAE with no debt.

I want to diversify my portfolio in 2 of the largest world reserve currencies so that's why I asked this question.

[Valuethinker]

I got everyone's point.

Home currency is PKR
Income is in USD & EUR
Portfolio is 50% US + 50% Europe equity

Will add bonds later as I am currently 38 and a small rental property in UAE with no debt.

I want to diversify my portfolio in 2 of the largest world reserve currencies so that's why I asked this question.

Bond funds will diversify your currency risk. They normally hedge to a particular currency.

Equity funds generally do not hedge. So what currency you buy and sell them in is totally irrelevant.

Rather you want global diversification in equities, this is the most diversified currency exposure you can get.

[Anon9001]

I am an asian investor with no preference of currency.
I am looking to create a different kind of diversified portfolio with USD/EURO currency hedge and without including Emerging Markets and Asia Pacific Markets.

I believe adding too many regions makes a portfolio over diversify which creates more harm than good.

50% VUAA- Vanguard FTSE S&P500 - (USD Base)
50% VWCG- Vanguard FTSE Developed Europe- (EURO Base)

I Will add 20% bonds later.

I believe this is same as ACWI/Global Index as 80-90% of ACWI is in Europe and USA stocks. If I were you I would just get rid of the Euro stocks as they have high correlation with US stocks.

The valuations are more attractive there but for a long time horizon like 30 years I expect the performance to be the same for the two.

[Valuethinker]

I got everyone's point.

Home currency is PKR
Income is in USD & EUR
Portfolio is 50% US + 50% Europe equity

Will add bonds later as I am currently 38 and a small rental property in UAE with no debt.

I want to diversify my portfolio in 2 of the largest world reserve currencies so that's why I asked this question.

Since Europe, including the UK, is only about 20% of world index (I'd have to check the exact percentage) this is way overweight European equity. We have seen with the Ukraine war & energy crisis that Europe carries its own special risks. Also it has very few technology stocks: ASML and SAP are the 2 largest tech companies - have you heard of either? Right now this is good as tech sector is taking a pounding. But it's been bad news for over a decade - USA recovered from 2008-9 Crash much faster and to a higher level than European stock indices.

Holding European equities is not a good way of getting exposure to the EUR currency. That's the point we keep trying to make that you cannot seem to understand? It doesn't matter what currency the equity fund is denominated/ priced in, the returns will be the same after one adjusts for currency.

If you want EUR exposure you either hold a European government bond fund (which will nearly be 50% Italy) or a fund (bonds or equity) that hedges into Euro. Most bond funds do hedge currency. Most equity funds do not.

I would either hold a global equity index fund, or something like 60% US stock fund, 20-25% Europe including UK, 10-20% Asia -- you can work that out by looking at the percentage weightings of any global index fund or ETF. The weightings change somewhat if you include emerging markets (basically China & Taiwan pick up a percentage).

[Khan]

Thanks.

Sticking to Global index and Global bonds with USD due to better liquidity and low spread.
80% VWRA
20% AGGU