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Hi all,

I am trying to track my portfolio returns (of which many funds are denominated in USD, such as IEMG/IEFA). I would appreciate if any knowledgeable folks on the forum could confirm my understanding on currency fluctuations and their "effect" on reported performance:

Take XEF and IEFA as an example. These are are the same fund, except based out of Canada and the USA, respectively. There's about a 7% difference in return between the two funds (going back a period of 3 months from today), which I presume is solely due to the US dollar gaining strength (the US dollar has gained roughly 7% on the $CAD), reducing the value of the US-denominated IEFA's shares. Am I interpreting this correctly?

If so, should I consider XEF's return to be a closer measure of "true" performance of the EAFE region (at least in the eyes of a Canadian), as it doesn't factor in any $USD fluctuations.

Also, going one step further - would one need to apply this same 7% filter to US-denominated stocks that are actually based out of the US? As an example - say the S&P500 is down about 30% YTD - would I need to factor the $USD's strength when measuring S&P performance relative to other countries? (ie: if factoring in $USD fluctuations with the S&P, would it really only be down ~23% or so, once that 7% gain the $USD is included - or am I deluded with how this works?).

Thanks in advance for any assistance!

Franko
 

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The thing is you should always consider returns in your home currency, i.e. CAD equivalent. XEF represents your true return as a Canadian in Canada, not IEFA which however, reflects true value to the American buyer. In times of a declining loonie, XEF will give you a 'bonus' in that the declining loonie makes XEF that much more valuable to you. If you look at IEFA returns, you really then have to factor in the forex change which then puts you back into the same ballpark as XEF's returns.

It is easier to have this rationalization with an S&P500 fund like SPY versus ZSP. ZSP will look like a higher return than that of SPY, but that is because ZSP is in CAD and actually reflects the true value to you. The primary difference between SPY's return and ZSP's return is mostly the slide of the loonie.
 

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Discussion Starter #3
The thing is you should always consider returns in your home currency, i.e. CAD equivalent. XEF represents your true return as a Canadian in Canada, not IEFA which however, reflects true value to the American buyer. In times of a declining loonie, XEF will give you a 'bonus' in that the declining loonie makes XEF that much more valuable to you. If you look at IEFA returns, you really then have to factor in the forex change which then puts you back into the same ballpark as XEF's returns.

It is easier to have this rationalization with an S&P500 fund like SPY versus ZSP. ZSP will look like a higher return than that of SPY, but that is because ZSP is in CAD and actually reflects the true value to you. The primary difference between SPY's return and ZSP's return is mostly the slide of the loonie.
Thanks for clarifying that.

So, when looking at comparative returns of several Canadian-domiciled international funds, say VUN (US), XEF (EAFE) and XEC (emerging markets) versus the TSX, those funds are generally faring a bit better than the TSX, down about 25% vs. the TSX's 35% drop.

Is my understanding correct that a weakening loonie has buffered the losses on these Canadian-domiciled international ETFs (as you said, ZSP is only down about 23% vs the SPY's 30% decline), but has not spared the TSX of course, hence the larger than normal decline of the TSX relative to the international funds?

Frank
 
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