The following question from JS is about currency risk:
If I buy an ETF such as VEA (Vanguard Europe Pacific) through an American exchange and the US dollar falls, will my fund lose value on this basis even though the value of the Euro with respect to the US dollar might rise? In other words, does the value in Canadian dollars reflect the value of the American dollar or the international currency in the countries where the companies making up the fund reside?
While many international ETFs are denominated in US dollars and trade in a stock exchange in the US, they hold the underlying assets in the local currencies. For instance, VEA holds stocks that are traded in the UK, Japan, Continental Europe and Australia etc., which are denominated in Pounds, Yen, Euro and the Australian Dollar respectively and would be influenced by the fluctuation of the US dollar against those currencies. The result is that Canadian investors are exposed to the fluctuation between our dollar and the basket of foreign currencies. Canadian Financial DIY had written an excellent post on this topic: Clarification of Foreign Exchange Risk on International ETFs.
You can essentially ignore the CAD-USD fluctuation for broad international ETFs like Vanguard Europe Pacific ETF (VEA), iShares MSCI EAFE ETF (EFA), Vanguard Emerging Markets ETF (VWO), iShares MSCI Emerging Markets ETF (EEM) etc., country-specific ETFs like iShares MSCI Japan ETF (EWJ), iShares MSCI Australia ETF (EWA) etc. and even ADRs that trade in US exchanges but are denominated in local currencies like Nokia (NOK).
