Currency Risk When Buying Foreign Stocks
If you buy a US-listed stock from Europe, you take on two bets: the company and the exchange rate.
Why this matters for beginners
Currency moves can quietly add to or subtract from your real return, and most beginners don't realize they're exposed to them.
Main explanation
When you buy a stock priced in a foreign currency (e.g. a US-listed stock in USD as a EUR-based investor), your return is the stock's return combined with the change in the EUR/USD exchange rate.
If the stock rises 10% in USD but the USD weakens 10% against the EUR, your EUR return is roughly flat. The opposite is also true.
Many global ETFs are 'unhedged'. They pass currency moves straight through to your return. Some ETFs offer hedged versions that reduce currency exposure at a small cost.
Currency risk isn't necessarily bad, it's just another variable. The key is to know it exists and to understand whether you're exposed.
Example using a real company
Consider a European investor buying Microsoft (MSFT). Microsoft's stock might rise 15% in USD, but if the dollar falls 10% against the euro, the actual EUR return is much smaller.
- →Buying VUSA (USD S&P 500 ETF listed in EUR). You still hold USD assets underneath, so currency moves affect your real return.
- →Buying a EUR-hedged version of the same index, currency moves are largely smoothed out, at the cost of a small hedging expense.
Common beginner mistakes
- ✕Assuming a US-listed stock's % return is the same as your real return in your home currency.
- ✕Not realizing that 'global' ETFs are usually unhedged.
- ✕Treating currency exposure as automatically bad rather than as a variable to be aware of.
Key terms
- FX (foreign exchange)
- The market in which one currency is traded for another.
- Hedged ETF
- An ETF that uses derivatives to reduce currency exposure.
- Unhedged exposure
- Holding a foreign asset where currency moves fully affect your return.
Key takeaways
- 01A foreign stock = a bet on the company plus a bet on the currency.
- 02Most global ETFs are unhedged by default.
- 03Hedged versions reduce currency noise but add a small cost.
Check yourself
- 01Currency moves can affect the return on a foreign stock in your home currency.
- 02All global ETFs are currency-hedged.
Try the concept on a real company
Look at a foreign-listed company in the Analyzer. The business analysis is in one currency; your real return depends on your home currency too.
Educational examples only. Not buy or sell recommendations.