Converting Foreign-Currency Portfolio Benchmarks into Domestic Currency

Summary

The document raises a benchmark currency problem for a European investor whose portfolio is measured in euros but holds mostly unhedged US securities. It asks whether converting a US equity benchmark using spot EUR/USD rates produces a fair comparison, and how that approach differs from currency-hedged index methodologies based on forward contracts.

The author notes that exchange-rate movements can affect reported portfolio returns independently of the underlying stocks, so comparing a euro-denominated portfolio directly with a dollar-denominated benchmark may mix investment performance with currency exposure. The document cites a substantial gap between a manually spot-converted index return and a reported EUR-hedged index return for a stated period, but does not explain or validate that difference. It provides no answer, calculation procedure, or guidance on choosing a benchmark. The issue to resolve is whether the goal is to measure the investor's actual unhedged experience or equity performance with currency effects removed; those benchmarks represent different exposures.

Key ideas

• A portfolio and its benchmark should be compared in a consistent reporting currency.
• Spot conversion incorporates realized currency movements into benchmark returns.
• A forward-based currency-hedged index represents a different exposure from a spot-converted unhedged index.
• The document poses the benchmarking question but does not supply a resolution or methodology.

Tags

# Benchmarking a foreign portfolio with SPY?


# Benchmarking a foreign portfolio with SPY?












Here is something I'm struggling with for a few days now. I'm an European individual investor managing a small portfolio in EUR. However I mainly hold US securities, in USD. I do not hedge my exposure to the USD.

I would like to benchmark the performance of my portfolio against an index. SPY seems an obvious choice since most of my portfolio is invested in the US. However, since my portfolio is denominated in EUR the comparison is not fair at all: on a given period, if the EUR looses value against the USD, my portfolio may outperform the SPY, even if the stocks in it may be underperforming.

My question is : can I use the EUR/USD Fx rate to convert the values of SPY to make a custom "SPY (EUR) Index" ? How is the industry dealing with the problem of benchmarking a portfolio in domestic currency, invested in foreign currencies?

I've read a paper written by MSCI that explains their methodology to hedge currencies in their indexes. It uses Forward rate contracts, a bit more complicated than my suggested method of converting SPY with spot rates...

S&P also have an SPX EUR Hedged Index made with forward rates but I don't understand what it does.. YTD it as returned 0.81% however I manually converted SPX using EUR/USD spot rates and it has returned 4.98%, quite a difference..

I'm lost

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