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Spain, February 27, 2023.
Risks of investing in American ETFs explained by Juan Antonio Corbacho
Juan Antonio Corbacho (@mrcorbacho), manager of Jcapital, explains a very dangerous trend that currently exists and is being highly promoted by many influencers on social networks. This trend is to invest in American ETFs (stock exchange traded funds). Believing that “the stock market always goes up” and that “you can live on dividends”, many retail investors are jumping into this market without knowing the reality of it. In this type of investment there are some aspects to take into account. The first is that ETFs such as those on the SP500 index can have sharp falls and take years and decades to recover. For example, in 2022 the Sp 500 has suffered the biggest drop since the 2008 crisis. The Sp 500 started the year trading at 4,800 points, accumulated losses of almost 30% during 2022, reaching 3,492 points. In investing in ETFs, there are not only bullish cycles, there are also bearish ones. The second is that the dividend payment comes from the share price, that is, a share that is listed at $100 and pays a dividend of $5 per share, on the day that pays the $5 drops its price to $95 since those $5 have come out of the share price. The SP500 is made up of the 500 largest companies on Wall Street. The third and perhaps the most important is that American ETFs are bought and sold in US dollars, and what happens if the investor’s currency is not the dollar? Well, simple, that when you are going to collect profitability, if there is one, you will have to change to your currency and the exchange rates move. In 2022, for example, 1 euro has been exchanged for 0.95 US dollars. For example, if the investor’s currency is the euro and the Eur/Usd pair rises, he will lose part of what he is earning due to the return of the ETF or even having obtained a positive return, he may lose money when making the change. An example, in an investment of €10,000 in Sp500 when it is trading at 4,000 and the Eur/Usd changes to 1.00, when the operation is closed the SP500 is trading at 4,200, that is, it has risen 5% but the Eur/Usd is changing at that moment to 1.20, that is It’s up 20%. The result of the operation is that he has $10,500 of the SP500 worth €8,750. Is it surprising? Well, it is so, what has been gained on the one hand is lost in the currency exchange. In order not to have this risk, you would have to have subscribed to an exchange rate hedging product, these types of derivative products are complex and difficult to contract. In short, this type of operation a priori seems very profitable and not very risky, but as soon as one investigates a little into the background of it, it is observed that “all that glitters is not gold”
ContactContact name: Juan Antonio CorbachoContact description: mrcorbacho on instagramContact phone: 692973722
