What is the difference between a fund's trading currency and its underlying currency?

Every fund has two kinds of currency, and they are easily confused:

The trading currency, or listing currency, is the currency in which the fund's shares are quoted and traded on a particular exchange. The same ETF can be listed in euros in Frankfurt and in US dollars in London.
The underlying currencies are the currencies of the assets the fund actually holds — the dollars, yen and pounds in which its companies' shares are priced.

Only the underlying currencies determine currency risk. The trading currency is just the unit in which the price is shown.

Why the trading currency does not matter

The price of a fund in its trading currency is its net asset value converted at the current exchange rate. For a fund of US stocks listed in euros, with the exchange rate quoted in dollars per euro:

P_{\text{EUR}} = \frac{\text{NAV}_{\text{USD}}}{\text{EUR/USD}}

If the fund's US holdings are unchanged but the euro rises against the dollar, the euro price of the fund falls — even though it trades in euros. Buying the euro listing instead of the dollar listing changes nothing about this; it only changes the currency in which the price is shown, and possibly which currency conversion fees the broker charges.

A simple illustration

An S&P 500 ETF has a net asset value of 100 US dollars per share and is listed in euros. At an exchange rate of 1.10 dollars per euro:

P_{\text{EUR}} = \frac{100}{1.10} \approx 90.91

Over the next month the US stocks do not move, but the euro rises to 1.15 dollars:

P_{\text{EUR}} = \frac{100}{1.15} \approx 86.96

The euro-listed fund has lost about 4.3% in euros, purely because of the exchange rate. Its euro listing did not protect the investor from the dollar.

What does remove currency risk

Currency-hedged share classes, which offset the underlying currency exposure with forward contracts.
Investments in euro-area assets, such as euro-zone stocks or euro-denominated bonds.

Why the distinction matters

Currency exposure should be measured by underlying currency. A portfolio made entirely of euro-listed global ETFs can have most of its value in US dollars.
Returns differ by currency. A fund's return in euros and in dollars can be very different; the relevant one is in the investor's own currency.
Costs: buying a listing in a foreign trading currency can add conversion fees at the broker without changing the underlying exposure at all.

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