The currency and your ETF

A guide to helping your clients understand investing globally, locally.


Have you ever wondered why the performance of your global (exchange-traded fund) ETF sometimes looks like it is moving in the same direction as the global index it tracks and at other times it doesn’t?

If an investor holds the Satrix S&P 500 ETF, the Rand is used to purchase this ETF and earns US dollar returns. There are, however, two primary drivers of the performance of this ETF:

  • the Rand performance of the S&P 500 Index in US dollars, and
  • the Rand performance versus the US dollar.

When investing offshore, two levers need to work in your favour:

  • The underlying asset needs to appreciate (i.e. the S&P 500), and
  • the currency you are investing in should strengthen (or the Rand weaken). If the Rand strengthens, this will offset any growth achieved in the S&P 500.

Real-world example

Let’s assume you wanted to buy yourself a high-tech drone that was not available in South Africa. You would probably use your credit card and purchase this through a retailer in the USA.

Suppose the Rand/dollar exchange rate was R10/$1 and the drone was priced at $1 000. Your purchase would cost you R10 000. Assume a year later, you wanted to sell your drone. The price for it in the USA has increased to $1 100, but the value of the Rand has strengthened to R9/$1. In Rand terms, it is now only worth R9 900, even though in dollar terms it has increased in value to $1 100.

The weakening of the dollar (strengthening of the Rand) would have devalued your purchase, even though it is worth more in dollar terms. You probably wouldn’t find many buyers at R11 000 ($1 100 x R10/$1), as they would be able to purchase it for R9 900 at the current exchange rate, directly from the retailer.

The same approach is used when valuing ETFs, except this occurs on a real-time basis throughout the JSE’s trading hours. To illustrate the performance of the Satrix S&P 500 ETF we have plotted the following chart (see above). Each line represents the cumulative compounded
performance starting at the close of 31 Dec 2018 through to the close of 14 May 2020. A description of each line follows:

S&P 500 (USD) This is the performance of the S&P 500 Total Return Index in US dollars, and is the performance we want from our underlying investment in US dollars. It cumulatively returned 17% over this period.

USD/ZAR This is the performance of the dollar versus the Rand. On 31 Dec 2018, it closed at R14,38/$1 and strengthened to R18,60/$1 (Source: IRESS).

S&P 500 (ZAR) This is the performance of the S&P 500 Total Return Index in Rands. This is what our investment is tracking. It is calculated by multiplying the S&P 500 Index level by the exchange rate, as we did in the real-world example above. Over the period it cumulatively returned 51,2%, because the weakening Rand relative to the dollar added to the growth in the S&P 500 in dollar terms.

Investing offshore is a great way to diversify your investments, but it does introduce currency risk, particularly if the currency you have invested in gets weaker. Investing for the long-term and having a disciplined approach to saving each month are timeless strategies to grow wealth.

– Kingsley Williams, CIO, Satrix

Satrix Managers (RF) (Pty) Ltd (Satrix) a registered and approved Manager in Collective Investment Schemes in Securities and an authorised financial services provider in terms of the FAIS. Collective investment schemes are generally medium- to long-term investments. Unit Trusts and ETFs the investor essentially owns a “proportionate share” (in proportion to the participatory interest held in the fund) of the underlying investments held by the fund. With Unit Trusts, the investor holds participatory units issued by the fund while in the case of an ETF, the participatory interest, while issued by the fund, comprises a listed security traded on the stock exchange. ETFs are index tracking funds, registered as a Collective Investment and can be traded by any stockbroker on the stock exchange or via Investment Plans and online trading platforms. ETFs may incur additional costs due to it being listed on the JSE. Past performance is not necessarily a guide to future performance and the value of investments / units may go up or down. A schedule of fees and charges, and maximum commissions are available on the Minimum Disclosure Document or upon request from the Manager.

Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Should the respective portfolio engage in scrip lending, the utility percentage and related counterparties can be viewed on the ETF Minimum Disclosure Document. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The index, the applicable tracking error and the portfolio performance relative to the index can be viewed on the ETF Minimum Disclosure Document and or on the Satrix website. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-div date. Performance is calculated for the portfolio and the individual investor performance may differ as a result of initial fees, actual investment date, date of reinvestment and dividend withholding tax. Some funds may hold assets in foreign countries and could be exposed to risks such as potential constraints on liquidity and the repatriation of funds, macroeconomic, political, foreign exchange, tax risks, settlement risks and potential limitations on the availability of market information.