eMaxi Slims with current exchange rate?

[pam5]

Hi all,

I’m sure this point has been discussed before or asked in a different thread, but what are everyone’s thoughts on buying eMaxi slims all country and s&p 500 with the exchange rate being as bad as it is?

I’ve never bought eMaxis before and used to invest solely into vanguard funds but from my understanding eMaxi slims are bought in USD. Won’t the exchange rate erode any gains I would make?

My “strategy” is to buy and hold until retirement. Any guidance would be appreciated!

 

[tlh]

@pam5 Worrying about the exchange rate at any particular moment is one form of market timing. It may work out in your favor or it may not, but the usual advice against trying to time the market applies.

One thing you should know is that it doesn’t matter which currency the fund is traded in, or what country the fund management company is based in. All of this cancels out. The only relevant factor is the underlying holdings. So every fund tracking the same index (S&P500, MSCI, Nikkei225, whatever) is essentially identical in terms of exchange rate risk because they have the same holdings.

 

[pam5]

@tlh Thanks for this and sorry for the late reply. Since I am living in Japan and am paid in JPY, my assumption is that given the poor exchange rate of JPY -> USD, any shares denominated, or with an underlying denomination in, USD are more expensive for me. For example, if 100 JPY = 1USD and 1 share of emaxi slim is $100 usd, then my cost is 10,000 JPY. However due to the poor exchange rate maybe now 100 JPY is .67 USD, which means that my 1 share of emaxi slim now costs me 14,700 JPY. Are you saying this is not an important consideration?

 

[tlh]

@pam5 If you're buying an S&P500 fund (for example), it doesn't make a difference at all whether the fund accepts payment in yen or in dollars (or any other currency). I know this may be surprising. Here's one explanation of the issue: https://andrewhallam.com/expatriate-investors-does-it-matter-which-currency-your-etf-is-listed-in/

The long & short of it is, you either give $100USD to the fund and they buy $100USD worth of S&P500 (which is worth 14,700JPY), or you give 14,700JPY to the fund, which they convert to $100USD and do the same thing with the same result. Any time you buy shares in an American company, it is always ultimately bought and sold on American exchanges in USD. The same is true for all-country funds (for their countries' respective currencies).

Additionally, it doesn't really matter what the exchange rate is when you buy the fund, just like it doesn't matter what the share price is when you buy it. It only matters how it changes between the time you buy & the time you sell. If you feel the yen, being very low at the moment, is likely to rise in value faster than the S&P in the future, then you can bet on that by holding onto the cash, or buying Japanese equities instead of international. This is market timing.

 

[primarymay]

@pam5 Setup a monthly tsumitate, and forget about rates.

If you have a lump sum, invest it all now. Or if you cannot stomach that cut it in half. Lumpsum half, DCA the rest.

Statistically lump sum is the best approach though.

 

[jandolphrohnson]

@pam5

from my understanding eMaxi slims are bought in USD

At most your money might pass through USD briefly on its way to becoming company shares. Of course shares in US companies (and even some non-US companies) have a value that's somewhat correlated with the USD.

Won’t the exchange rate erode any gains I would make?

If the exchange rate continues the way it's been going then it will enhance your gains. If it turns back to where it was then it will erode them a little. Neither way is going to be significant compared to the return you can expect between now and retirement.

If you know what the exchange rate is going to do then you should be a professional currency trader. If you don't, it's not worth worrying about, unless you're incredibly risk-averse (in which case you might want to stick to domestic investments or even just holding cash - you'll miss out on a lot of gains that way though).

 

[pam5]

@jandolphrohnson Posting from a reply to a comment above: I am living in Japan and am paid in JPY, my assumption is that given the poor exchange rate of JPY -> USD, any shares denominated, or with an underlying denomination in, USD are more expensive for me. For example, if 100 JPY = 1USD and 1 share of emaxi slim is $100 usd, then my cost is 10,000 JPY. However due to the poor exchange rate maybe now 100 JPY is .67 USD, which means that my 1 share of emaxi slim now costs me 14,700 JPY. Are you saying I shouldn’t worry about this?

 

[jandolphrohnson]

@pam5 You shouldn't worry about what currency shares are denominated in, any more than you worry what currency, IDK, bricks are denominated in. If you buy a brick for 147JPY or you buy a brick for $1, it's the same brick, and when you come to sell the brick the price you get for it will be only loosely related to what USD/JPY has done in the intervening period.

Now if you think the actual companies are overvalued, or too exposed to the dollar, or you don't want to spend JPY because you think it's undervalued at the moment, those might be reasons not to buy now. But what currency the share price happens to be listed in is, in itself, irrelevant. (If the underlying companies do business in USD, for example, then the exchange rate matters to you a bit. But there are plenty of companies/funds whose shares are listed in USD who do business elsewhere, and plenty of companies/funds listed in JPY who do some, maybe most, of their business in the US).

 

[pam5]

@jandolphrohnson Thanks, but what if you take position that the current JPY/USD exchange rate is a an exception and that rates will eventually normalize to their historical averages? Wouldn’t that imply that if you purchase now, you’d be “overpaying” for your brick because you could’ve gotten more brick for the same amount of JPY if you waited a bit longer?

 

[jandolphrohnson]

@pam5 Depends if you think the exchange rate is out of whack because USD is overvalued or because JPY is undervalued. What matters is whether the price of the brick in JPY is good or bad; the price of the brick in USD isn't necessarily the "true" or "fair" price any more than the price in JPY is (even if the USD price is somehow the "official" one).

 

[pam5]

@jandolphrohnson Yes exactly, I agree with you. The issue is the price of the brick in JPY is by definition relative to the USD since the underlying assets are originally priced in USD.

 

[jandolphrohnson]

@pam5 I mean you can price anything in USD if you want to. But that's not necessarily any more or less reflective than pricing then in any other currency. The "all country" funds will generally own shares that are "natively" priced in all sorts of currencies (admittedly USD will be the single biggest chunk), and these kinds of funds aren't buying and selling large amount of shares in cash at any given time - even if they do create shares in cash rather than in-kind, the vast majority of their holdings will be shares that they've held for a long time and will continue to hold for a long time.

 

[preciousklay]

@pam5 If you expect the exchange rate to move significantly, it is actually better to hold eMaxis (or other yen denominated) funds as they allow currency gains/losses and capital gains/losses to cancel each other out for tax purposes, and also make currency gains get taxed at capital gains level, which is usually lower (forex gains are miscellaneous income, so they get taxed at your marginal tax rate while capital gains get taxed at 20%).

 

[pam5]

@preciousklay Really wish I understood what this meant

 

[preciousklay]

@pam5 Let me give an example with simplified numbers.

Option 1: yen gets weaker

Option 1.1: USD denominated fund

1. Start with 150,000 yen, convert it to $1,000 today (using 150 yen per dollar exchange rate for simplicity)
2. Buy 10 VT funds (using a $100 price for simplicity)
3. After 5 years we sell at $140 each, so get $1400 back ($400 capital gain). Capital gain is taxed at 20% in Japan, so pay $80 tax, remains $1320
4. Convert it back to yen. The yen meanwhile got weaker to 200 yen per dollar, so we get 264,000 yen (200,000 yen is the original investment, 64,000 yen is the capital gain). We made 50,000 yen due to the exchange rate change, and this is miscellaneous income and will be taxed at our marginal rate:
   1. Assuming a yearly salary in the 6.8-9 million range, this will be 33%, so we pay 16,500 yen tax on it. In the end we are left with 247,500 yen after paying all the taxes, which results in a net yearly rate of return of 10.5%
   2. At a yearly salary of 9-18m, this will be 43% which means a tax of 21,500 yen and an end result of 242,500 yen (net rate of return of 10%)

Option 1.2: yen denominated fund

1. Start with 150,000 yen
2. Buy a total world fund at 10,000 yen a piece, so we get 15 units
3. Since they track the same index as before, their value goes up by the product of the appreciation in dollar (40%) and the exchange rate change (150->200 = 33.33%): 1.4*1.33=1.862 -> 86% up.
4. We sell it after 5 years at 18,667 yen a piece so we get 280,000 yen
5. The gain of 130,000 yen is all considered capital gain so gets taxed at 20% meaning a 26,000 yen tax bill and we are left with 254,000 yen which corresponds to a net yearly rate of return of 11.1%

So the yen denominated fund wins.

Option 2: yen gets stronger

Option 2.1: USD denominated fund

1. Start with 150,000 yen, convert it to $1,000 today
2. Buy 10 VT funds
3. After 5 years we sell at $140 each, so get $1400 back ($400 capital gain). Capital gain is taxed at 20% in Japan, so pay $80 tax, remains $1320
4. Convert it back to yen. The yen is now 100 yen per dollar, so get 132,000 yen
5. Now we have a miscellaneous income loss of 50,000 yen. If we have other misc income, we can deduct it from there, but otherwise there is no tax benefit for this (afaik, please correct me if I'm wrong on this, I didn't check it in detail)
6. In the end we are left with 132,000 yen

Option 2.2: yen denominated fund

1. Start with 150,000 yen
2. Buy a total world fund at 10,000 yen a piece, so we get 15 units
3. Since they track the same index as before their value goes up by the product of the appreciation in dollar (40%) and the exchange rate change (150->100 = -33.33%): 1.4*0.667=0.933 -> 7% down.
4. We sell it after 5 years at 9,333 yen a piece so we get 140,000 yen.
5. We lost 10,000 yen, so there is no tax to be paid. If we have capital gains elsewhere we can deduct this from those, but without that we are left with 140,000 yen in the end.

Yen denominated fund wins again.

Option 3: yen exchange rate stays the same

Option 3.1: USD denominated fund

1. Start with 150,000 yen, convert it to $1,000 today
2. Buy 10 VT funds
3. After 5 years we sell at $140 each, so get $1400 back ($400 capital gain). Capital gain is taxed at 20% in Japan, so pay $80 tax, remains $1320
4. Convert it back to yen. The yen is still 150 yen per dollar, so get 198,000 yen.
5. No exchange rate change, no gain from that, so no more tax. We are left with 198,000 yen

Option 3.2: yen denominated fund

1. Start with 150,000 yen
2. Buy a total world fund at 10,000 yen a piece, so we get 15 units.
3. After 5 years the fund went up 40% so it's now 14,000 yen a piece
4. We get 210,000 yen. 60,000 yen is the capital gain, gets taxed at 20% (12,000 yen), we are left with 198,000 yen

In this case both options are identical, so whichever has the lower fees (likely the dollar denominated) would be slightly better.

Taxes are complicated and there is a chance I made a mistake or misunderstood something, so please correct me if I'm wrong on any of this.

 

[placemat]

@pam5 Whether tou are buying vanguard or emaxis it’s more or less the same.

 

[marie0628]

@pam5 It's a legitimate concern.. but I think the upside of 20-30 years of gains still makes it the correct play.

 

[mary44]

@pam5 Look for the fund's 目的・特色 pdf and search for 為替ヘッジ (currency hedging/forex hedge) to understand the asset classes within the fund and their exposition to currency rates.

General consensus is that for long-term passive investors, currency risk is minimal to non-existent. Retiring here means you need yen and not dollars anyway, so I don't see anything against investing in such broadly diversified funds.

 

[preciousklay]

@mary44 Doesn't currency hedge have prohibitively high fees for long-term investors?

 

[mary44]

@preciousklay Yes, currency hedge costs more and adds up to the fund's TER while it only makes sense for shorter periods if at all. Currency fluctuations cancel out in the long run, in a nutshell weaker yen lets you buy more shares while stronger yen makes imported goods cheaper and look at the biggest companies in the fund, Apple and Microsoft make money in over 150 countries, not just in USD.