By Rodan Gordon | Yeul Sachir — FINCOME
A rise in a US stock market index does not guarantee the same return on our savings in shekels. When an investment has unhedged exposure to the US dollar, the result depends both on investment performance and on changes in the dollar–shekel exchange rate.
So when we read headlines about gains on Wall Street and compare them with a statement from our Israeli pension, education fund (keren hishtalmut) or other savings account, we need to understand exactly what we are comparing.
How does the dollar affect returns in shekels?
For an investment with unhedged dollar exposure, two factors operate at the same time:
- Investment performance: whether the asset gained or lost value in dollars.
- The exchange rate: whether the dollar strengthened or weakened against the shekel over the same period.
If the investment rises and the dollar strengthens, both factors can increase the result in shekels. If the investment rises but the dollar weakens, the currency movement can reduce the gain — and in some cases even produce a negative return in shekels.
The reverse is also possible: a stronger dollar may cushion a decline in the investment's value.
An example: the investment gained 10%, but the return in shekels is 4.5%
Suppose we invested an amount worth ₪100,000 at the start of the period, with full dollar exposure and no currency hedge. During the period, the investment gained 10% in dollars, while the dollar weakened by 5% against the shekel.
The calculation is:
1.10 × 0.95 − 1 = 4.5%
At the end of the period, the investment would be worth ₪104,500, before costs and tax.
We do not simply subtract 5% from 10%, because the exchange-rate change applies to the investment's value after its gain.
This is a hypothetical illustration only. It does not describe the performance of any particular index, fund, pension product or policy, and assumes no deposits or withdrawals during the period.
Does every overseas investment have dollar exposure?
No. An investment's location, the currency in which its price is quoted and its actual currency exposure are different things.
An investment option can invest abroad while hedging some or all of its currency exposure. Other investments may have exposure to several currencies, rather than just the dollar.
Buying a fund in shekels does not mean it is currency-hedged. To understand its exposure, check its investment policy and reports, rather than relying only on the fund's name or trading currency.
Hedging aims to reduce the impact of exchange-rate movements. It does not eliminate investment risk, may involve costs and does not guarantee a better return.
Why does the index return differ from the return on my savings?
The exchange rate is only one possible explanation. Differences can also arise from the investment mix, costs, the timing of contributions and the calculation method.
Before comparing returns, check:
Are the periods identical? A year-to-date return is not the same as a return over the past 12 months. The start and end dates for exchange-rate data must also match the investment period.
Are the figures in the same currency? An index return in dollars is not directly comparable with an investment option's return in shekels.
Does the index include dividends? A price index and a total return index, which assumes dividends are reinvested, can show different results.
Does the investment option invest only in that index? A portfolio combining equities, bonds and other assets should not be expected to behave like a single stock index.
Which costs are included? Check whether the figure is before or after management fees and other costs. Tax, where applicable, also affects the amount left to the investor.
Were there deposits or withdrawals? A change in the account balance is not necessarily the investment return. Contributions, withdrawals and their timing affect your personal result.
What should you do with this information?
The first step is to understand your existing savings before deciding to change them.
Find out the currency exposure of each investment option, whether it is hedged, how your savings are diversified and when you expect to need the money. If you plan to spend in shekels, foreign-currency exposure can add volatility relative to that spending need. If you plan to spend in another currency, the considerations may differ.
There is no allocation that suits everyone. The decision depends on your goals, time horizon, needs and ability to cope with losses.
A strong year in Israel is not, by itself, a reason to move all your savings there; a strong year in the United States is not a reason to concentrate all your savings there either. Decisions about currency hedging should not rely solely on trying to predict the dollar's direction next month.
How is this relevant to freelancers and professionals?
Freelancers and professionals working with overseas companies may encounter currency exposure in two places: their ongoing income and their savings.
Someone paid in dollars who pays their expenses in shekels may see their shekel income change even if their workload remains the same. Separately, their savings may have exposure to the dollar or other currencies.
These are two different exposures worth understanding as part of your overall financial picture.
Yeul Sachir — FINCOME provides a service that employs freelancers and service providers as salaried employees, including invoicing and payroll administration within the service. For questions about pension savings and currency exposure, you can contact Rodan Gordon to understand what can be reviewed and which professional is appropriate for the next step.
Frequently asked questions
Does a weaker dollar mean the investment lost money?
Not necessarily. The investment can gain value in dollars while a weaker dollar reduces the return in shekels. The result depends on the combination of both changes and the investment's characteristics.
Is an investment option purchased in shekels protected against dollar movements?
Not necessarily. The purchase currency alone does not determine currency exposure. Check whether the option is hedged and what its actual exposure is.
Should you always choose a hedged investment option?
There is no single answer. Hedging changes currency exposure and may involve costs. Whether it is suitable depends on your savings goals, the currency of your expected expenses and the investment's other characteristics.
Where can you check currency exposure?
Start with the investment policy and reports published by the provider managing your savings. If the information is unclear, ask the provider to explain the currency exposure and hedging policy.
Is an index return enough to assess my pension or education fund?
No. You also need to check the investment mix, measurement period, currency exposure, costs and transactions in your account.
Want to understand your savings better?
Contact us to request a conversation with Rodan about your savings allocation and currency exposure. Please mention the savings product you want to review and your main question.
Arrange a conversation through FINCOME
This article provides general information and illustrations only. It is not investment advice, pension advice or a personal recommendation to take any action. The example is not a forecast or the return of a specific product. Past performance does not guarantee future returns.