At StashAway, we build our General Investing and Goal-based portfolios using global ETFs that are denominated in USD. This means that when you deposit funds into your StashAway account, your funds are converted from SGD to USD to purchase the ETFs that make up your portfolio asset allocations.
You may have noticed that your StashAway portfolios can display your returns either in USD, or SGD, and that the returns shown may be different in each currency. In this guide, we’ll explore how currency impacts your returns and how we use currencies to manage your portfolios’ risk exposure.
As your deposited funds are converted to USD, your portfolio is exposed to the fluctuations in the relative value between SGD and USD. Basically, your investments will be positively (or negatively) impacted when the USD rises (or falls) against the SGD, holding all other factors constant. This gain or loss on the value of the USD against the SGD is called currency impact.
On the performance page in your StashAway app, your portfolio return comprises dividends and capital gains when you toggle to USD. On the other hand, when you toggle to SGD, your returns comprises dividends, capital gains, and the currency impact.
The currency impact is measured by the difference between the current exchange rate and the exchange rate at which you invested your funds. The table below shows how currency impact is measured in your SGD returns. Assume that you deposited $1,000 SGD on 1 January and another $1,500 SGD on 1 February at the prevailing exchange rates on those dates. The total amount invested in your portfolio is $1,815 USD at an average rate of $1.377 SGD per $1 USD.
Let’s assume that on 1 Mar, SGD depreciated against the USD so that $1 USD can buy $1.42 SGD. If there are no changes to the returns on your investment, meaning there weren’t any dividends or capital gains, your investment of $1,815 USD is worth $2,577.30 SGD on March 1. In other words, you’ll have a $77.30 SGD (or 3.092%) gain because your investments in USD appreciated in value as the USD strengthened against SGD. This currency gain is included in the calculation of your return in SGD.
Though our portfolios are made up of US-listed ETFs, our portfolios are globally-diversified. This means your portfolios are invested in asset classes with exposure to various geographical markets, not just the US market. Our ETF selection includes assets in China, Asia ex-Japan, emerging markets, and European markets.
In addition, these global ETFs are made up of companies that operate in their respective region in their respective currencies. As such, your portfolios have indirect exposure to multiple currencies through these ETFs. For instance, if your portfolio has an allocation to the US-listed Japanese equities ETF, you gain exposure to the Japanese companies in the ETF that derive their earnings in Japanese Yen. Hence, you’re taking on zero USD exposure in the Japanese ETF.
The US Dollar, along with the Japanese Yen and Swiss Franc, is one of the major funding currencies in the world. Because of this, the US dollar becomes a safe haven for investors and tends to outperform most currencies in a global stock market correction, or in a bear market.
The USD exposure in your portfolio acts as a built-in portfolio insurance to manage your risk exposure during a market correction. For instance, during the 2008 financial crisis, the USD appreciated against the SGD by 13.5%. This appreciation contributed valuable risk reduction for local investors.
Country-specific events, such as political upheaval, natural disaster, or an economic slowdown can negatively impact your investments in a particular country. By investing in asset classes in different geographic territories, you minimise the impact of such isolated and country-specific events on your portfolio.
In addition, each country has its own economic cycle and growth trends. If your investments are only concentrated in Singapore, you may miss opportunities to gain returns from growth-oriented assets in other economies such as China and the US.
In essence, the combined exposure to the US dollar and other currencies through our global ETF selection is one of the ways in which StashAway diversifies your portfolio. This diversification allows you to capitalise on potential gains globally while keeping your risk level consistent.