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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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  • $\begingroup$ "can I use the EUR/USD Fx rate to convert the values of SPY to make a custom "SPY (EUR) Index" Yes, that's quite reasonable IMO. This will give the return of an unhedged holding, such as you have. $\endgroup$ – Alex C Jul 5 '18 at 23:52
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    $\begingroup$ There are 3 returns that people talk about :(1) the return on SPY to a USD based investor, (2) the return to SPY in EUR terms, i.e. the unhedged return to a EUR based investor who buys SPY in a EUR based account, (3) the hedged return to a EUR based investor who in addition to buying SPY attempts to eliminate FX risk by shorting USD forward contracts. This is a number close to (1) but not exactly the same because of interest rate differences between the 2 countries that affect forward pricing and because of inevitable (but usually small) hedging errors. It seems t me what you want is (2). $\endgroup$ – Alex C Jul 6 '18 at 15:22
  • $\begingroup$ Man that was clear as crystal! Do you think it is fair to use (2) as a benchmark in my case ? $\endgroup$ – rmrndr Jul 8 '18 at 9:40
  • $\begingroup$ SPY is an ETF with SP500 as benchmark. Why you don't use an ETF with SP500 as benchmark hedged to EUR, such as this IE00B5BMR087? $\endgroup$ – maxdangelo Jul 11 '18 at 19:03
  • $\begingroup$ I'm sorry, the right ETF I was willing to mention is this one: IE00B3ZW0K18 - IUSE (Link: goo.gl/tCiPBF). This ETF will give you the same value (consider the tracking error, the cost of hedging and different TER) an US investor would get for SPY, but is quoted in EUR. Tracking this you could have an index. $\endgroup$ – maxdangelo Jul 11 '18 at 21:33

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