Study: FX drag (how currency conversion quietly compounds)

FX drag is the return you lose to currency conversion spreads, markups, fixed fees, and avoidable “FX churn.” It’s not glamorous, but it’s one of the most common recurring leaks for European investors buying global ETFs.

FX drag study hero banner showing a side-by-side comparison of investing with no currency conversion versus frequent conversions, illustrating how FX spreads and conversion fees quietly reduce compounding and lead to a lower final portfolio value over time, with currency symbols, charts, and cash visuals.

Fast default: if you’re doing regular EUR→USD conversions (or buying USD-quoted exposures), you want a broker with a clean multi-currency workflow and transparent FX pricing. IBKR is a practical “default” for many non-US investors.

Fast decision

  • Fix FX drag first: reduce spread/markup + stop unnecessary conversions.
  • Then keep it boring: fund → convert only when needed → buy the same ETF(s) on schedule.
Open with IBKR → Cheapest FX broker (Europe) → Check IBKR pricing →

Disclosure: We may earn a commission if you open an account using our links. You do not pay extra.

Educational content only. Not personalized investment advice.

TL;DR

  • FX drag = spread/markup + fixed conversion fees + “FX churn” (converting back and forth) + avoidable execution mistakes.
  • The key insight: percentage FX costs scale linearly with contributions; fixed fees punish small, frequent conversions.
  • Rule: stop converting currencies you don’t need. If you must convert, reduce repeated micro-conversions and avoid round trips.
  • Practical default: pick a broker with a clean FX workflow, then keep your monthly plan boring and consistent.

QUICK ANSWER

What is FX drag?

FX drag is the long-run performance loss caused by currency conversion costs (spreads/markups, fixed conversion fees/minimums, and unnecessary conversion churn). It often matters more than small ETF TER differences.

  • • Spread/markup: you convert at a slightly worse rate than mid-market.
  • • Fixed fee/minimum: you pay a flat fee that punishes small conversions.
  • • FX churn: repeated EUR→USD→EUR loops become a silent recurring tax.
  • • Bad execution: market orders + thin conditions widen the hidden cost.

FX drag: the 4 mechanisms that create the leak

1) SPREAD / MARKUP

You don’t convert at mid-market. The difference (often shown as a spread or “markup”) is an immediate haircut on every conversion.

2) FIXED FEES / MINIMUMS

A flat conversion fee (or a minimum) punishes small, frequent conversions. This is where “death by FX” usually comes from.

3) FX CHURN

Converting back and forth because of indecision, switching brokers, or buying/selling in different currencies creates a repeated tax.

4) EXECUTION MISTAKES

Market orders in thin moments, poor listing choice, or wide spreads can amplify the “invisible” cost even if your headline FX fee looks low.

Related execution guides: ETF liquidity & spreads · Tracking difference vs TER · Fees really matter

Key chart

Stylized example: two identical portfolios, but one pays recurring FX leakage (spread/fees) from frequent conversions. Both start at 1.00×; the gap is the drag.

FX drag: clean FX workflow vs recurring FX leakage (stylized) 1.18× 1.14× 1.10× 1.06× 1.02× 0.98× 2021-01 2021-12 2022-12 2023-06 2023-12 2024-06 2024-12 Clean FX workflow Recurring FX leakage

Stylized chart for intuition. Real outcomes depend on your currency pair, broker pricing, frequency of conversions, and market path.

Important: reducing conversion frequency only helps if you don’t introduce a new problem: leaving contributions uninvested for months (cash drag). The clean solution is usually: minimize FX costs without breaking your monthly investing consistency.

FX churn: the avoidable drag most people don’t notice

The worst FX drag is not a one-time conversion. It’s repeated conversions created by messy behavior: switching tickers, selling and rebuying in different currencies, “testing” brokers, or converting back to EUR because you got nervous.

  • Round trips compound damage: if you pay a spread going EUR→USD and again USD→EUR, your effective drag is roughly doubled.
  • Overtrading creates FX work: more trades often means more currency decisions and hidden spread costs.
  • Fix the system: pick the wrapper (UCITS vs US) and keep a stable monthly plan.

If you’re EU/UK retail and blocked from US ETFs, stop fighting it: UCITS vs US ETFs · Decision pages: Best broker for US ETFs (non-US)

How to reduce FX drag (practical playbook)

PLAY #1

Stop unnecessary conversions

Convert only when you must. Avoid EUR→USD→EUR loops caused by indecision or “trying things.”

PLAY #2

Minimize fixed-fee pain

If your broker has fixed FX fees/minimums, avoid tiny conversions. Don’t let your funding rhythm get punished.

PLAY #3

Keep investing consistent

Reducing FX fees is useless if it makes you delay investing for months. Consistency is the main edge.

PLAY #4

Use better execution habits

Prefer liquid listings and sensible limit orders. Avoid “thin” moments that widen hidden costs.

Execution + costs: Limit orders & spreads · Tracking difference vs TER · Cheapest FX broker (Europe)

FX drag is one piece of the “silent leakage” stack. If you want the full picture, combine this with fee compounding and cash drag.

Study: fees compound → Study: cash drag → Guide: fees really matter →

CALCULATOR

FX drag calculator

Turn FX spread/markup into a long-run cost. Useful for non-US investors buying USD assets on a schedule.

Open calculator → Read the study →

Best when: you convert currency often, your broker hides FX markup, or you invest monthly.

FAQ

Is FX drag the same thing as FX risk? +
No. FX risk is currency movement changing your returns. FX drag is the cost you pay to convert currencies (spread/markup, fees, churn). You can have FX drag even if FX rates never move.
Does conversion frequency matter if the FX cost is only a percentage spread? +
If it’s purely a percentage cost and you invest on schedule, the total euro drag is mostly linear with contributions. Frequency matters more when there are fixed fees/minimums or when frequency changes your investing behavior (cash drag).
What’s the biggest avoidable FX mistake? +
FX churn: converting back and forth because you keep switching plans, tickers, or brokers. One clean setup beats constant “optimization.”
If I’m EU/UK retail and can’t buy US ETFs, what’s the right move? +
Use UCITS ETFs. Same index exposure is usually available in a compliant wrapper. Read: UCITS vs US ETFs.
How do I sanity-check my broker’s FX cost? +
Compare the executed rate to a mid-market reference at the same time, then translate the difference into a percentage. Do this on a normal day, not during extreme volatility.
What matters more: a 0.05% TER difference or FX friction? +
Often FX friction, especially if you pay wide spreads or fixed fees repeatedly. TER is visible; FX drag is the silent leak.

Bottom line FX drag is controllable. Fix the FX workflow, stop churn, and keep a boring monthly plan. That beats endless micro-optimization.

Cheapest FX guide (Europe) → Open with IBKR → Check IBKR pricing →

Disclosure: We may earn a commission if you open an account using our links. You do not pay extra.

Educational content only. Not personalized investment advice.

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QuantRoutine provides educational content only. Nothing on this page is an offer, solicitation, or recommendation to buy or sell any security or to open an account with any specific broker. Investments can lose value, and past performance does not guarantee future results. You are responsible for your own investment, tax, and legal decisions. Always review current terms and fees on official websites.

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