A different question on US ETF currency exchange risks & high inflation.

2836 Views 2 Replies 2 Participants Last post by stephenheath, May 20, 2009

stephenheath

Discussion Starter · May 20, 2009

This question is based on the assumption that the US dollar will in the future be experiencing high inflation, which, all else being equal, will cause regular devaluations against all other currencies.

Right now most of my worldwide investments are covered by Vanguard ETF's, which are held in US dollars. I have never been too worried about currency exchanges, because I have felt that in general, the exchanges of funds from the original currencies (euros, rubles, yen, etc) into the USD, and then ultimately from them to the CDN in the form of dividends, would basically offset each other.

However, recently I have been rethinking that .... some of the funds, like VWO and VEA only pay a single yearly commission.... that could mean that the foreign currency comes in early January, but is not paid out until December. In a time of high inflation, that could mean that instead of cancelling out, I may have lost a significant amount.

If that is the case, would it make more sense to find a fund that pays dividends more frequently, even with a higher MER than the vanguards, to avoid the currency loss?

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CanadianCapitalist

· #2 · May 20, 2009

I'm not sure how Vanguard handles dividend payments from holdings within VEA or VWO. I'd assume that they are converted into USD when they are received by Vanguard and paid out at the end of the year.

If so, it is true that if the USD depreciates between the time the dividends are received and when they are paid out, an investor could lose out.

I'm not sure if this should be a huge concern though. If the USD depreciates 10% in that time period and the dividend yield on VEA or VWO is 4%, the cost to an investor is 40 basis points. Even in the unlikely event of depreciation of this magnitude occurring every year, the total expense of holding these ETFs is still likely to be lower than other alternatives.

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stephenheath

Discussion Starter · #3 · May 20, 2009

If the USD depreciates 10% in that time period and the dividend yield on VEA or VWO is 4%, the cost to an investor is 40 basis points. Even in the unlikely event of depreciation of this magnitude occurring every year, the total expense of holding these ETFs is still likely to be lower than other alternatives.

Thanks CC, I wasn't looking at it from that perspective, but now that you've pointed it out (the 10% of 4%), it makes sense, and puts my mind at ease that my initial choices are still the right ones

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