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Will a rand- and dollar-denominated ETF have the same returns?

The simple answer is yes, but a number of other factors will affect returns.

I have a choice of two ETFs [exchange-traded funds] tracking MSCI Japan Equity index, one listed with a South African provider, Sygnia (so I assume rand-denominated), and the other is iShares, via Easy Equities US dollar account. The Sygnia ETF has much higher fees, while the iShares has a 0.49% management fee. 

This has me wondering, does a rand-denominated ETF that tracks an international index expect to have the same effective returns as a dollar-denominated one tracking the same index? Is one exposed to the rand-yen exchange rate, while the other is exposed to both the rand-dollar and dollar-yen exchange?

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The simple answer to the question would be yes. In general, the underlying returns should be similar, however, as you have pointed out there are a number of other factors that will affect returns.

While I have not looked at the specific companies quoted you do need to take into account a number of nuances that will affect ETFs.

These include:

  1. The underlying currencies of the ETF as opposed to the country currency that they plot (is the fund in yen or dollar);
  2. Whether the ETF is priced once per trading day (which mainly affects asset swap funds) or throughout the trading day;
  3. What the underlying fund manager fees are;
  4. Any tracking errors; and
  5. Slippage due to pricing.

Looking at point number one in greater detail – offshore ETFs are available in different currencies and they can be either hedged or unhedged variations.

  1. No currency hedging: priced in US dollar as opposed to yen, with subsequent currency volatility to take into account;
  2. Currency hedged: priced in US dollar but with currency hedging – this removes the currency volatility but with a small cost to pay for the hedge;
  3. ETF in the underlying fund currency – in this case, the yen.

So on the face of it picking an ETF should be simple, however, like other forms of investments not always easy. This is where a good financial advisor would earn their fee!



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