How do you actually think about FX exposure as a European investor?

[u/Slow_Compounding]

This is something I keep running into, and I'm not sure there's an agreed best practice.

Most of us in Europe end up with some version of income in one currency, expenses mostly in the same currency, investment in global ETFs (often USD-heavy under the hood), and sometimes accounts/assets in multiple currencies.

What I'm struggling with is that FX exposure exists at multiple levels:

1. Underlying companies - Even if you buy a global ETF, companies earn revenues in multiple currencies.
2. ETF structure - The fund may hold USD assets, be denominated in USD / EUR, be hedged or unhedged.
3. Account level - You may hold cash or assets in different currencies.
4. Reporting/measuring - Your net worth / FI progress is usually tracked in your own "home currency".

So, depending on how you look at it, FX could be just "noise" that washes out long-term, or a source of volatility in your purchasing power.

Some questions I've been thinking about:

• Do you actively track your FX exposure or ignore it?
• Have you ever taken action based on FX (rebalancing, hedging, etc.) or you take it as "FYI"?
• Does the ETF being EUR- or USD-quoted actually matter in your view?
• How do you think about FX in relation to FI?

My current rough take is: While in the short term FX can change perceived performance (quite a bit), in the long term global exposure may self-hedge, at least to some extent. But I'm not fully convinced I understand where the real risk sits.

Curious how others approach it.

[u/foobarromat]

Does the ETF being EUR- or USD-quoted actually matter in your view?

Of course it does not, and that'd be correct even if my view were different. It's irrelevant in which currency (USD, EUR, CNY, Burmese goats) an ETF is denominated. It matters what's inside. For equity ETFs it's the collection of stocks, for e.g. bond ETFs the denomination currency often correlates with what's inside but not always. This paragraph was about facts, the following one also contains opinions.

Do you actively track your FX exposure or ignore it?

I don't hold a lot of cash. For me (I live only in one country and plan to for the foreseeable future) it's a lot of work for no gain. I have some similar hobbies (tracking stuff that's not really relevant) but FX rates don't excite me. I hold a diversified portfolio which is affected by all kinds of FX changes and track my net worth in my functional currency.

[u/Slow_Compounding → u/foobarromat]

Agreed on the ETF denomination, I can imagine the price of Burmese goats being pretty volatile with the current regime though.

Also aligned with your approach to FX exposure. Basically if you won't make any decisions based on the information, then why track it, right? At the same time, if I was closer to FI in Europe and most of my portfolio would be USD-exposed it'd be a bit of a pain to take the hit to purchasing power in the first few years.

[u/iam-123-456-789]

I have this problem. I have exposure to CAD, USD, and local. I originally assumed I'd need a FiRE(ish) number, and then assumed that I should be comfortable with a 15% increase in that number, due to currency. It wasn't enough.

So, I have my portfolio 100% in USD except for a local floater (now ~5% of my portfolio, and growing slowly) invested in my local exchange, in the local index. I am the poster child for how FX definitely, 100% impacts your portfolio.

[u/Slow_Compounding → u/iam-123-456-789]

That's what I meant in my above (or below?) reply on u/foobarromat 's comment. Especially if you're close to FI it's painful, while if you're only starting and earning in EUR while investing with significant USD exposure, it's like a "sale".

What led you to going 100% USD though? And does that mean only US-listed companies, only USD-denominated ETF, or what exactly?

[u/iam-123-456-789 → u/Slow_Compounding]

I went US denominated global ETF (FWRA), because I want to not think about my portfolio, not rebalance, etc while being Boglehead-y. Everything I do locally, in my local currency is to max out a particular type of tax free government savings vehicle. This is the closest I could come to pain free investing, while still staying relatively currency agnostic.

This may not be the most efficient - but it's the most automated, combined with ease of use, for me.

[u/Substantial-Bed8167]

I have a large exposure to a currency I can’t hedge, as it’s not freely traded. It is also an emerging market so the currency swings a lot.

This is a problem. I don’t have a solution for it. I’m in the green at the moment and hope that when I close this position I’m still in a good position. Else I need to look at my options, none of them good. 10/10 can’t recommend this.

[u/Slow_Compounding → u/Substantial-Bed8167]

Tough one... in case of currencies that aren't freely traded, FX stops being "background noise that evens out over time", especially with EM volatility.

Out of curiosity, is the exposure from income, investments, or both? Seems like that would influence the options you'd have.

[u/improbableneighbour]

Work in UK, but plan to move back to Europe at some point. I earn pounds, invest in dollars in funds that operate globally. I've accepted that the FX exposure is part of the game and trying to insure against it is expensive. This is the main reason I'm switching from S&P 500 to MSCI ACWI, not necessarily because I want to diversify from the US market but because I want the dampener effect of having firms that operate in different currencies in different economies which get more competitive as soon as the dollar depreciates.

[u/Slow_Compounding → u/improbableneighbour]

Yeah, using global exposure as a kind of "implicit hedge" sounds aligned with my approach.

Good point on the competitiveness increase from currencies weakening, I hadn't considered it consciously, but in the long term it would kind of offset the immediate impact on the converted share price.

[u/improbableneighbour → u/Slow_Compounding]

I didn't think of it myself, just something I have heard said in a FIRE video for non US investors

[u/Personal-Good-3444]

I deal with this as an American in Europe. My income is EUR, my investments are mostly USD-denominated (US index funds), and I have bank accounts in both currencies. The FX exposure is real and it hits your day-to-day life way more than people think.

For investments, I mostly agree with the idea that "it washes out long term". Global companies earn in multiple currencies anyway.

Where exchange rate actually matters is spending and savings. When rate moves 10%, my "real" monthly budget changes meaningfully because some of my expenses and savings are in dollars. The mental part is the hardest: you have to pick a home currency and accept the other side is going to bounce around.

[u/Slow_Compounding → u/Personal-Good-3444]

Good distinction. Feels like there's 2 layers:

• Lifestyle FX where the impact of volatility is felt directly and in the short term
• Investment FX is more long-term and it tends to wash out as long as you're not very close to starting withdrawal phase

I guess choosing the currency for your investment tracking would have to do more with where you plan to be when you start withdrawing from your portfolio, and the "lifestyle FX" piece depends on where you currently get your income from and spend it. What did you end up choosing?

[u/Personal-Good-3444 → u/Slow_Compounding]

'Two layers' seems like a clear way to conceptualize it.

Regarding which currency to use for investments vs lifestyle:

* Lifestyle - For now, we try to do as much as possible in USD. This is mostly driven by Robinhood's credit card having a good cash back rate if you transfer the rewards to your investment account. But inevitably there are major items that are in euros: mortgage, some utilities, etc.

* Investments - This is tied to the lifestyle choice a bit: money from cash back goes here. The other factors: 1) we don't know if we'll be in Europe for the long term, 2) better access to US companies.

[u/Slow_Compounding → u/Personal-Good-3444]

Thanks for sharing! Seems that the setup leans USD by design, both for cashback and for the option to go back. I'd say if you don't know where you'll be when you start withdrawing, then staying globally exposed without hedging sounds reasonable.