VUSA - Vanguard UCITS ETF S&P 500 in Euros, loss more than index

[niaa]

I have invested in Degiro in the VUSA ETF. The plot of the ETF follows the S&P (1 month data) but the S&P is down 0.5% and I am down 2.6%. I have not performed any other transaction, just bought 10 pieces of that ETF.

I can't undestand the reason for the discrepancy. Any ideas? Any hidden costs i don't know?

 

[veilmenacex]

@niaa If you bought it in EUR you're exposed to currency fluctuations, beacuse the fund is invested in USD. Check how EURUSD is moving and you will understand your returns.

EDIT:
Explained in the video

 

[bhibatsu]

@veilmenacex The fund is invested in S&P 500 stocks, not USD.

If I trade 100€ for 113USD to buy some gold I'm not invested in USD, I'm invested in gold, roughly 100€ or 113USD worth, minus whatever fees I paid.

What I think you're getting at is that when measuring the percentage change over time it's not the same to measure in USD or EUR, because unlike a length or a weight, the currencies themselves change in value over time and so you'll get different percentage changes.

 

[veilmenacex]

@bhibatsu By invested in USD i meant that the fund currency is USD. Meaning it invests in shares with USD not EUR. When you buy shares of the fund in EUR it converts into USD and buys stock.

 

[bhibatsu]

@veilmenacex But that is irrelevant, you're only touching USD for a few minutes when buying and selling, the difference is in measuring the change in one currency or another, because the currencies themselves change in value.

If you measure in Venezuelan pesos it looks like the S&P500 had completely insane gains, for example, because each stock is worth a lot more pesos now than 10 years ago.

 

[veilmenacex]

@bhibatsu I think we are talking about the same thing. The point is if you buy funds that invest in indices abroad, you're exposed to currency flucuations beacuse you aren't investing in your home currency. Excatly like the pesos case you just gave.

 

[bhibatsu]

@veilmenacex

The point is if you buy funds that invest in indices abroad,

It doesn't matter what you buy them with, unless you're talking about opportunity costs.

I can buy stocks with euros and measure their performance with pesos if I want. I can exchange currencies very easily.

Opportunity costs are important but independent of the assets, if you hold both USD and Eur and you know USD will experience higher inflation you're better off spending USD. But that's for any purchases: investing or going to the supermarket.

 

[veilmenacex]

@bhibatsu You can measure them in whatever currency you want but the return will differ beacuse of the exchange rate, but at the end of the day you're going to need it in your home currency, beacuse you spend in it, obviously. So that is why you need to measure the return in home currency.

 

[bhibatsu]

@veilmenacex

but at the end of the day you're going to need it in your home currency, beacuse you spend in it, obviously.

Right, that's the opportunity cost of spending your home currency.
It doesn't matter what you invest it on, if you expect a return in the same currency you're exposed to its value fluctuations. Doesn't matter if it's European stocks or US stocks or gold or a bank deposit.

 

[veilmenacex]

@bhibatsu By invested in USD i meant that the fund currency is USD. Meaning it invests in shares with USD not EUR. When you buy shares of the fund in EUR it converts into USD and buys stock.

 

[trixiefire]

@veilmenacex

the fund is invested in USD

That's a bit misleading. The shares are the same regardless of the currency OP paid for them. Of course US stocks depend on the dollar, but only as far as the underlying company is affected by the dollar. US mining operations e.g. will probably gain from a losing dollar as people flee into rare metals. So OP is not invested "in USD". The only difference is that the S&P500 displays its value in USD and OP's ETF displays its value in EUR.

tagging /@niaa

 

[walkingwithkarma]

@trixiefire Hmm I'm not sure what exactly you're trying to say? If EUR/USD suddenly surges 10% (hypothetically of course), your investment will lose 10% as well if you invested in EUR, thus your return is tied to EUR/USD exchange ratio.

 

[trixiefire]

@walkingwithkarma nope, that's wrong. US companies don't move with the US dollar like that. A stock is an asset like any other. Imagine you bought gold on a US stock exchange. Of course the gold doesn't lose 10% when the dollar loses 10%, its value is the same regardless of where you bought it and what you paid for it. It might even gain value. Companies are a bit more complicated because a lot of their costs and revenues are tied to contractually fixed dollar amounts, so they are somewhat affected by the Dollar value. But also a lot are variable or tied to other currencies.

Edit: What I'm saying is 100% correct. Downvoting basic math is peak reddit idiocy. C'mon, people.

 

[willumg]

@trixiefire This is very confusing, your explanation makes most sense but you have the most downvotes

 

[trixiefire]

@willumg yeah, it's infuriating. People don't know the very basics but feel confident enough to downvote the people trying to teach them.

 

[walkingwithkarma]

@trixiefire Let's say the EUR/USD ratio is 1.000.

If I have 100 EUR and I buy gold on US exchange for USD. I now have 100 USD worth of gold.

A year later EUR/USD is at 1.1000.

Let's say gold price hasn't changed for simplicity.

If I sell my gold now, I'll get 100 USD back, but when I want to convert it back to my home currency (EUR), I'll only get around 91 EUR, therefore I lost 9 EUR.

What aspect am I missing in your explanation? Genuinely curious. I'm newish to markets so I'll appreciate your explanation. Thanks.

 

[steve0000]

@walkingwithkarma

A year later EUR/USD is at 1.1000.

Let's say gold price hasn't changed for simplicity.

But it has. It has risen, in dollar terms.

What you're missing is that a currency only rises or falls compared to other currencies. But assets don't follow the exchange rate, their price fluctuates based on many other things.

The gold might rise or fall, irrespective to the amount of exchange rate change.

 

[trixiefire]

@walkingwithkarma If the gold price in USD hasn't changed, and neither did it in EUR, but the USD/EUR rate changed, you could buy gold in EUR, sell it in USD, convert the USD to EUR and repeat. It would be a free money glitch.

Just like with stocks, it is impossible that an asset that is easily traded over exchanges trades for a different price in USD and EUR. The answer to your question is that traders keep the price of gold or a stock very close to equal on all markets.

 

[veilmenacex]

@trixiefire You're correct about the arbitrage, but this isn't the case here. You buy shares of a fund with EUR, the fund buys shares with USD, meaning you now acually hold USD. So yes, if the price in USD stays the same and if the exchange rate changes, so will the price in EUR. But that is the exact same reason that when you sell and it converts back from USD to EUR, you will get a different amount and it can work out in your favour or against you. Google currency risk for more on this. If you ever worked at a company that works in multiple countries, you know that they constantly have to monitor and hedge against these risks with future conctracts.

 

[trixiefire]

@veilmenacex

You buy shares of a fund with EUR, the fund buys shares with USD, meaning you now acually hold USD

the fund could be buying the stocks of its index on any market for any currency. Apple shares traded on NYSE are interchangeable in every way with Apple shares traded on LSE. You are NOT holding USD. You are holding stocks.

But that is the exact same reason that when you sell and it converts back from USD to EUR, you will get a different amount and it can work out in your favour or against you

The point you're overlooking here is that OP needs the money in EUR either way. It doesn't matter to OP whether the fund converts it to EUR or whether he buys a fund denominated in USD and has to manually convert it to EUR. OP's currency risk remains exactly the same.

If you ever worked at a company that works in multiple countries, you know that they constantly have to monitor and hedge against these risks with future conctracts.

I acknowledge that companies are subject to currency risk. I am saying the currency risk is exactly the same regardless of whether the fund is denominated in USD or EUR.