Archive | April, 2011

Currency Hedging in International Funds

Currency hedging can be confusing for investors who use index funds and ETFs that hold foreign stocks or bonds.

The basic idea, which I have written about before, is not terribly hard to understand. If a Canadian buys an unhedged index fund that tracks US stocks, her returns will suffer if the US dollar declines against the loonie. (On the other hand, she’ll get a boost if the greenback appreciates.) If a fund uses currency hedging, however, you can expect the same return as the underlying stocks, regardless of the currency fluctuations.

But things get complicated when there is more than one foreign currency involved. The iShares MSCI EAFE Index Fund (XIN) covers more than 20 countries, and the stocks are denominated in British pounds, Japanese yen, euros, Swiss francs, Australian dollars and a few others. The hedging strategy is designed to eliminate the effect of fluctuations in all of these currencies compared with the loonie. So investors in XIN should expect the same return in Canadian dollars that local investors in Europe, Asia and Australia receive in their own currencies.

US funds rarely use hedging

I’m not sure why,

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Why I’ve Given Up On Indexing

 

[Note: This post was an April Fool's joke!]

This potato is getting off the couch once and for all. That’s right: after several years of studying the art and science of index investing, I have decided that the strategy simply doesn’t work. As a result, I am in the process of liquidating my ETFs and index funds and switching back to an active strategy. I suggest you do the same.

This isn’t a decision I made lightly. But the more I have looked into it, the more I’ve become convinced that indexing is a loser’s game. Here’s why:

Index funds are for only for dumb people. I don’t mean to dismiss index investing out of hand. It’s fine for people who aren’t smart enough to beat the market, such as the fools who manage the UK national pension scheme and the half-wits who run CalPERS, the largest public pension fund in the US. Passively managed investments make sense for institutional investors, since they lack the time and expertise needed to pick stocks and make shrewd economic forecasts. But the strategy is not suited to retail investors,

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