Robert Gaudiosi
For investors, the foreign exchange rates used to calculate index returns may be an afterthought at best. But they can affect measured performance, benchmark tracking and even the assessment of active managers.
In a new paper, Robert Gaudiosi, quantitative research lead for FX benchmarks at LSEG, quantifies the extent to which index returns change when the FX conversion convention changes, either through the benchmark calculation time or the source used for FX rates.
FX matters for benchmark returns
Global equity and bond indices bring together securities denominated in multiple currencies. To express those securities’ performance in a common currency, index providers need an FX reference rate.
At first glance, the choice of FX rate may not seem that important, but the decision has practical consequences. If an index uses one FX benchmark while a portfolio is valued (or its currency transactions are executed) using another rate, a difference can emerge between portfolio and index returns, even when the underlying securities have not changed.
Putting FX returns into context
Currency movements often play a significant role in the returns of a global securities portfolio. To illustrate this, in Table 1 we show the bond and currency contributions to the returns of the FTSE World Government Bond index (FTSE WGBI), measured in US dollars, over the last ten years.
In five of the ten years and measured in absolute terms, the return from currency movements was greater than the underlying bond markets’ return.
From an unhedged dollar-based investor’s perspective, foreign exchange movements could reinforce the underlying global bond market’s performance (as in 2017 and 2020, when the dollar weakened), but they could also detract from the global bond market’s return (as in 2021, 2022 and 2024, when the dollar strengthened).
Table 1: FTSE WGBI return attribution
Year |
Bond Attribution (%) |
FX Attribution (%) |
|---|---|---|
2017 |
1.25 |
6.19 |
2018 |
1.13 |
-1.92 |
2019 |
5.89 |
-0.06 |
2020 |
5.51 |
4.37 |
2021 |
-2.55 |
-4.54 |
2022 |
-14.66 |
-5.11 |
2023 |
4.84 |
0.56 |
2024 |
1.03 |
-3.80 |
2025 |
2.55 |
4.89 |
2026 |
-0.89 |
0.17 |
Source: FTSE Russell. Unhedged USD return attribution of the FTSE WGBI from 02/01/2017 to 29/05/2026. Past performance is not a reliable guide to future returns.
But does the choice of FX rate matter?
Currency movements are one thing. But does the source of the FX data matter as well? To test this, we constructed hypothetical FTSE WGBI return series in which the bonds, country weights and local-currency returns remained unchanged while the FX rates were varied.
Like many major global equity and bond indices, the FTSE WGBI uses the WMR London 4pm Closing Spot Rates to convert foreign exchange exposures into a single currency. So we looked, firstly, at what happened if the same WMR framework was used, but FX was observed at a different point in the day. And second, we looked at what happens if FX rates were observed at the same time but using a different source.
Timing can create a meaningful return difference
In Table 2 we show the results of the analysis, conducted over the last ten years and expressed in terms of annual returns.
Table 2: Annual FTSE WGBI Basis for Different FX Treatments (basis points)
| Year | WMR 09:00 vs 16:00 (bps) | WMR 12:00 vs 16:00 (bps) | WMR 15:00 vs 16:00 (bps) | Composite 16:00 vs WMR 16:00 (bps) |
|---|---|---|---|---|
| 2017 | 17.2 | 19.3 | 1.1 | -2.5 |
| 2018 | 12.2 | 11.5 | 2.4 | 4 |
| 2019 | -0.6 | -0.9 | 0.4 | -4.1 |
| 2020 | 37.1 | 19.5 | 17.5 | 2 |
| 2021 | -33.8 | -30 | -20.4 | -4.3 |
| 2022 | 18 | 19.1 | 11.4 | 6.8 |
| 2023 | 3.2 | 3.3 | -6.6 | -7.6 |
| 2024 | 27.9 | 17.3 | 7.4 | -0.2 |
| 2025 | -29.7 | -13.2 | -12 | 3.4 |
| 2026 YTD | -6.6 | -13.2 | -1.9 | 0.5 |
Source: FTSE Russell, from 02/01/2017 to 29/05/2026. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
The composite RIC is constructed from the latest indicative FX quotes contributed by individual banks, and therefore differs from the WMR benchmark methodology, which is calculated over a 5-minute calculation window centred on the hour and uses venue trade data for 25 currencies.
Moving the FX observation only one hour away from the WMR London 4pm benchmark produced an average absolute WGBI return difference of just under 10 basis points per annum.
In certain market environments, the differences were larger. In 2021, for example, using an earlier WMR benchmark time produced an annual WGBI basis ranging from -20.4 basis points (using the 3pm rate) to -33.8 basis points (using the 9am rate). Expressed in terms of the cash impact on a theoretical portfolio, a 30 basis point return difference corresponds to approximately $3m on a $1bn exposure.
The FX source differences were also visible over a full year: in 2023, for example, the WGBI basis between Composite RIC and WMR at 4pm reached -7.6 basis points, equivalent to approximately $0.76m on a $1bn exposure.
The implications extend to manager assessment
Perhaps the most interesting result of our study concerned the measurement of active performance.
Suppose a manager has genuinely outperformed or underperformed a benchmark by a small amount based on the underlying investment positions. If the portfolio and benchmark used different FX conventions, the resulting FX basis could have altered that apparent relative return.
In our historical analysis, we asked how often that basis would have been sufficiently large to reverse the sign of the manager's measured active performance.
For underlying active returns of around plus or minus 5 basis points, using a different FX source at the same 4pm observation time generated a sign reversal in roughly 20% of the historical observations examined.
Timing differences had an even larger effect: using the historical distribution of the FTSE WGBI timing basis, the probability of a sign reversal remained positive for substantially larger levels of underlying active performance, in some cases extending to around 60 basis points.
All this highlights a measurement issue. An inconsistent FX convention can introduce a component of active return that has nothing to do with the manager's underlying investment decisions.
Certainly, any differences in FX timing and source need to be identifiable and correctly attributed. If you are a portfolio manager, consultant or asset owner, can you answer these three questions?
- Benchmark convention: Which FX benchmark and observation time are embedded in the index?
- Portfolio valuation: How do the manager, administrator and custodian translate foreign currency assets?
- Execution: At what rates is FX transacted and how is any execution difference reflected in performance attribution?
Where the FX conventions differ, the resulting basis should be understood before it is interpreted as investment performance.
FX timing and source matter
FX is an important component of unhedged global index returns. But our analysis also shows that the mechanics used to measure that FX exposure matter.
For asset owners, the practical takeaway is therefore consistency and transparency.
Where an FX source like WMR 4pm is embedded in a benchmark (as it is in the FTSE WGBI and in many other global indices), make sure that your other portfolio measurement and management tools are tuned accordingly.
Understanding how FX is implemented, valued and measured relative to that benchmark can help distinguish genuine investment performance from differences created by the measurement convention itself.
Disclaimer
© [2026] London Stock Exchange Group plc and its applicable group undertakings (“LSEG”). LSEG includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. “FTSE Canada”, (4) FTSE Fixed Income LLC (“FTSE FI”), (5) FTSE (Beijing) Consulting Limited (“WOFE”), (6) FTSE EU SAS ("FES"). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, WOFE, FTSE EU and other LSEG entities providing LSEG Benchmark and Index services. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “Refinitiv”, “WMR™” “FR™” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of LSEG or their respective licensors.
FTSE International Limited is authorised as a Benchmark Administrator and regulated in the United Kingdom (UK) by the Financial Conduct Authority ("FCA") according to the UK Benchmark Regulation, FCA Reference Number 796803. FTSE EU SAS is authorised as Benchmark Administrator and regulated in the European Union (EU) by the Autorité des Marches Financiers (“AMF”) according to the EU Benchmark Regulation.
All information is provided for information purposes only. All information and data contained in this publication is obtained by LSEG, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical inaccuracy as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or LSEG Products, or of results to be obtained from the use of LSEG products, including but not limited to indices, rates, data and analytics, or the fitness or suitability of the LSEG products for any particular purpose to which they might be put. The user of the information assumes the entire risk of any use it may make or permit to be made of the information.
No responsibility or liability can be accepted by any member of LSEG nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any inaccuracy (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of LSEG is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of LSEG nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of LSEG nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indices and rates cannot be invested in directly. Inclusion of an asset in an index or rate is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may lawfully buy, sell or hold the asset or an index or rate containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index and/or rate returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index or rate inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index or rate was officially launched. However, back-tested data may reflect the application of the index or rate methodology with the benefit of hindsight, and the historic calculations of an index or rate may change from month to month based on revisions to the underlying economic data used in the calculation of the index or rate.
This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of LSEG nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of LSEG. Use and distribution of LSEG data requires a licence from LSEG and/or its licensors.
