How does the AUD/USD exchange rate impact ETFs?

Exchange rate fluctuations can indeed impact the performance of investments, particularly when you’re investing in assets denominated in foreign currencies. For Australian investors holding international assets, such as ETFs that track global indices, the value of these investments in Australian dollars can be significantly affected by changes in the exchange rate.

For example, ETFs like VGS (Vanguard MSCI Index International Shares ETF) and VDHG (Vanguard Diversified High Growth Index ETF), which include international equities, can be influenced by the AUD/USD exchange rate. If the Australian dollar weakens against the US dollar, the value of US assets increases when converted back to Australian dollars, potentially enhancing the returns of these ETFs for Australian investors. Conversely, if the AUD strengthens, the value of these investments might decrease when converted back to AUD, reducing the returns.

VAS (Vanguard Australian Shares ETF), on the other hand, primarily holds Australian stocks and is less directly affected by USD/AUD exchange rate movements. However, it’s important to note that many companies within the VAS portfolio may have international operations and could be indirectly influenced by exchange rate fluctuations through their overseas earnings.

When considering investments in specific companies from the S&P 500 or any other international assets, it’s crucial to be aware of the exchange rate risk. While investing directly in individual companies can offer the potential for high returns, it also comes with increased volatility and risks, including exchange rate fluctuations.

Most investors within the Pearler community prefer using mutual funds and ETFs for their inherent diversification, which can help manage and reduce the risks associated with individual securities and market volatility, including those stemming from exchange rate movements. This approach aligns with Pearler’s focus on long-term, steady investment strategies that aim to build wealth su

Show more.....

Hey Ruby, great question.

Yes, it does. I wrote about currencies and hedging here which talks about this a bit: https://pearler.com/explore/learn/blog/curren...

Basically, if the Aussie dollar falls, US shares are worth more in AUD, which benefits VGS and VDHG given their strong weighting to US shares.

If the Aussie dollar rises against the USD, the opposite happens, and US shares are worth less in AUD terms.

In practice, this leads to ETFs performing slightly better or slightly worse than the underlying shares, depending on the AUD/USD movements.

It impacts the economy too in various ways, which then has a flow-on effect to company profits and markets, but hopefully that’s ok as a brief explainer.

Hope that helps.
Dave