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..