We’re not quite in “northern peso” territory yet, but the Canadian dollar has taken a beating over the last couple of months. And any time there is a significant move in the markets—whether it’s stocks, interest rates or currencies—investors second-guess themselves. Of course, the financial media is always there to support them with hyperbole, overreactions and short-term thinking.
Investors might now be wondering if they should reposition their portfolios in light of the dollar’s weakness, and the subject of currency hedging inevitably arises. Let’s start with a refresher on how this strategy works.
When you hold US or international equities, you are also exposed to foreign currencies. The exchange rate between the Canadian dollar and these other currencies will affect your returns. Index funds that use currency hedging (these typically have “CAD Hedged” or “Currency Neutral” in their name) attempt to eliminate the effect of exchange rates and deliver the returns of foreign equities in their local currencies. For example, if the S&P 500 returns 10% for US investors, a currency-hedged S&P 500 should also deliver 10% in Canadian-dollar terms, regardless of whether the loonie rose or fell during the period.
A falling loonie is good for your foreign equities
I’ve received questions from investors who are worried the Canadian dollar will fall further and are wondering if they should switch to currency hedged funds for their US and international equities. But this is getting it exactly backwards. Currency hedging protects Canadian investors from a rising loonie, not a falling one.
This is actually quite intuitive. When we speak of the Canadian dollar “falling,” this implies an increase in the value of foreign currencies by comparison. So if you are exposed to US and international currencies in your portfolio, you will benefit from that increase. The worst time to use currency hedging is when the loonie is plummeting.
Now, if you believe the Canadian dollar has neared its bottom and will begin moving back up, then it makes theoretical sense to use currency hedging, because a rising loonie would harm returns. For Canadians who held unhedged foreign equities, the worst period in recent times was 2002 through 2007, when the Canadian dollar soared from about $0.63 to over $1.02 USD. During those six years, the S&P 500 returned over 6% annually in US dollars, but lost about 2% a year in Canadian-dollar terms.
Why hedging disappoints
I stressed the word theoretical for a reason. Currency-hedged index funds have a long history of high tracking error, which means they may not offer the protection investors expect. One reason is the cost involved in maintaining the forward contracts, although this is relatively small. The biggest factor is the volatility of currencies. Funds reset their currency hedges once a month, but big moves in the exchange rate frequently occur during the intervals. For that reason, hedging is not very precise. As Rob Carrick once described it: “Hedging is like playing hockey with a baseball bat. It can be done, but the results are clumsy.”
All of which means a currency-hedged ETF may not even protect you during a period of strong appreciation in the loonie. As Justin Bender found when he looked at the currency-hedged iShares Core S&P 500 (XSP), the strategy delivered no benefit at all from 2006 through 2011, even though the Canadian dollar rose more than 14% from about $0.86 to almost $0.99 during that period.
That’s why it’s not correct to say that the hedged-versus-unhedged decision should even out over the long term. Currency fluctuations might even out over the very long term, but unhedged funds will almost certainly track their benchmarks more precisely. Therefore, during periods when the Canadian dollar falls in value, you get the full benefit with an unhedged foreign equity ETF. But during periods when the loonie rises, the benefit of hedging may be muted, or even nonexistent.
It would be ideal if we could turn currency hedging on and off at the right times. But in the absence of this magical power, a better strategy is to keep your foreign equities unhedged and simply use a rebalancing strategy to smooth out the ride.
Even if I thought the Canadian dollar has bottomed out, I would have to take a huge capital gain to move my USD ETFs into those that are hedged.
Thanks Dan. I’ve been waiting for this subject to come up.
I remember painfully well the difficult period between 2002 and 2007, and I’m not anxious to repeat it.
I now have about 40% of my portfolio in US currency investments, which means things have plumped nicely over the last little while. My question is, would it ever make sense to try and lock in some of those gains by converting a portion of the US currency into Canadian dollars?
I realize that to be truly effective, I would have to reduce my exposure to the US markets by the same amount. Simply selling US$ ETFs and then buying Canadian versions would still leave me vulnerable to the Canadian dollar’s rise. But it is tempting to try to capture the recent gains somehow.
Or am I better off simply keeping my US$ investments and just letting them rise and fall with the US dollar over time, taking the bad with the good?
@Trevor: I’m going to follow up with another post about rebalancing with foreign currencies. It’s another common question these days.
Decided years ago against hedging because I had to admit to myself that I couldn’t predict markets, asset class performance, or the Canadian weather. It followed that predicting currency fluctuations in the loonie was also out of the question.
Dan, am i wrong in my assumption that i actually do have a form of hedging in my global portfolio, that if the Canadian dollar starts going up again, it likely means commodities are on the rise, and the Canadian equity component of my portfolio should likely start delivery better component of my total return?
@Francois: That is never a sure thing, of course, but usually when commodity prices are high the Canadian market does well. This is another reason to avoid hedging US dollar exposure. When commodities are weak, the US dollar tends to go up, so USD exposure can be an excellent diversifier for Canadians:
https://canadiancouchpotato.com/2014/03/06/why-currency-hedging-doesnt-work-in-canada/
@ CCP:
>> “We’re not quite in “northern peso” territory yet”
Nice allusion ;)
>> “Now, if you believe the Canadian dollar has neared its bottom and will begin moving back up …”
>> “It would be ideal if we could turn currency hedging on and off at the right times. But in the absence of this magical power …”
It’s unfortunate you use predicting the (currency) markets – unerringly at that – as your straw man to demolish in this case. As you know, the issue of portfolio currency exposure is not about “belief” or “magic”, it is a serious matter of relative market risk.
Currencies have (theoretical) economic equilibrium value against each other. As the market price of CAD against other currencies changes, and is therefore perceived to be “over-“ or “under-valued” relative to them, the risks in direction and magnitude of further moves can also change significantly. No predictions, no “bottoms”, just relative probabilities.
In addition, unlike stock markets – which if they survive over long periods are skewed upwards in movement – there are no guarantees that currency fluctuations will “even out” over any time period. So a large sustained move can have a major impact on long-term portfolio returns.
I get that given the nature and target audience of the blog you want to keep things simple, and that you’re fighting an upstream battle to make your point against the influence of mainstream financial media/ most “advisors”/ received “wisdom”. Perhaps the “magic” reference is just an attempt at investor psychological reinforcement.
But there are good arguments for “staying the course” – the imprecision of currency hedging for retail investors you explain is one – so why descend to bad ones, that just beg the question of how/ when/ why to deal with greatly changing portfolio risk profiles?
>> “investors second-guess themselves”
Bingo!
Portfolio management is largely about managing risk exposures, so I use the Couch Potato strategy because it is the perfect way to manage the most dangerous risk to my investing of all – behavioural risk … the possibility of me deciding to do something really stupid.
Even back when CAD fell to USD 0.62, before appreciating by 60% back to par, I made no changes to my portfolio currency allocation (never hedged). I knew at the time it was ridiculous to not make changes, given the obvious risk of CAD greatly appreciating again and thus suffering major avoidable losses (as happened) – but managing my stupidity was, and is today, more important.
It’s still fun to discuss the portfolio management trade-offs implied by “staying the course”, tho ;)
@ Brian:
>> “I would have to take a huge capital gain to move my USD ETFs into those that are hedged.”
A very good reason for me as well to ignore currency movements!
Hi Dan,
The international equity component of my couch potato portfolio is with RBC’s International Currency Neutral Index Fund (mutual fund):
http://funds.rbcgam.com/pdf/fund-pages/monthly/rbf559_e.pdf
RBC doesn’t have a non-hedged version of this index mutual fund. What to do? My portfolio is relatively small right now (<$25K) – is it worth it to switch to a different bank or just keep contributing until I have a more sizeable portfolio?
Very interesting. Thanks. I am still new to the couch potato approach and appreciate your articles as they are concise and easy to understand for new comers.
Hi Dan,
I think my TD e-series US fund charges .05% for currency hedging (used to anyway, I haven’t checked in a long time). That seems a small price to pay to avoid the volatility and uncertainty in the relationship between the two currencies. What if it doesn’t even out? What do you think?
Hi Dan,
Actually I should ask whether there is any literature other than Justin’s look at that fund that says currency hedging doesn’t work? Is it a given?
Another excellent article! I’glad also, that you, in your comments/responses section, point out the increased diversification we get when holding unhedged U.S. securities, which I think is one of the major values of foreign holdings. My question, though, is why did you specify, in your comment, U.S securities in particular? Would this diversification not also apply to other international securities?
@Rahim: I wouldn’t worry about holding a hedged international fund for now. At some point in the future if you switch to ETFs you can address the issue then. For now I’d encourage you to just keep saving.
@Véronique: Thanks for the comment, and hope you continue to find the blog helpful.
@Pat: It’s a common misunderstanding that currency hedging “avoids volatility and uncertainty.” It really does neither:
https://canadiancouchpotato.com/2014/03/06/why-currency-hedging-doesnt-work-in-canada/
There is actually quite a lot of data showing that currency-hedged funds have not performed as expected. Canadian Capitalist used to write about this issue regularly:
http://www.canadiancapitalist.com/performance-of-currency-neutral-sp-500-index-funds/
http://www.canadiancapitalist.com/performance-of-the-currency-neutral-msci-eafe-index-fund/
http://www.canadiancapitalist.com/the-costs-of-currency-hedging/
@Gerry P: It is a good idea to include exposure to non-US currencies, too, but the US dollar probably provides the greatest diversification benefit for Canadians. This because it has some negative correlation with the global equity markets (it often goes up when markets tank, as in 2008) and with commodity prices (and therefore Canadian equities, like now).
@CCP: Thanks for another interesting article! I’m in total agreement that I shouldn’t move existing unhedged foreign (US) ETFs to hedged ETFs (that just doesn’t make sense with a “low” dollar), and I also can’t argue that hedging makes a better long-term strategy. I am all for investors following simple, stable plans if that’s what keeps them on track. My thoughts are geared more toward my own tolerance for complexity and risk, so if you keep it simple, that’s great don’t stop.
Is there not a case where investing new $ in hedged ETFs (e.g., VUS) in the short-term and then moving back to unhedged (e.g., VTI/VUN) makes sense? I mean, the whole reason we’re talking about this is because everyone’s saying that the CAD$ is “low”. Ok, low relative to where it was a few months ago. I’m not saying invest in hedged ETFs forever and keep them there; I’m saying I believe over the short-term I expect the CAD to rise so buy hedged ETFs now (VUS), and when it goes up sell those and buy unhedged (VTI/VUN). Even if the tracking error is bad, it would not be as bad as the losses in the unhedged fund if the CAD $ goes up a few percent. (This may not be a good strategy for everyone in general, so I agree most should just stick to a KISS approach.)
@Cam: This all sounds very logical on the surface, but it’s just another attempt to predict the unpredictable, and it’s a slippery slope. Why not put new money in short-term bonds for a few years until interest rates go up, and then move them to longer maturities? Oops, interest rates went down. Why not wait for US stocks to pull back a bit before putting more money there? Damn, they continued to rise relentlessly. Why not sell your house in Vancouver and rent for a few years until house prices inevitably crash? You see where I’m going. Once you start deviating from a long-term strategy to take advantage of perceived short-term opportunities, you open yourself up to bad habits and big mistakes.
@ Steve:
What does this mean? “Currencies have (theoretical) economic equilibrium value against each other.”
Dan’s view that currency movements can’t be predicted, and that hedging isn’t a successful strategy to
avoid volatility makes sense to this novice investor. No “straw men” involved. In contrast, I have no idea what you’re saying in your post.
Jamie
From a portfolio of only $15,000, I newly have $200,000 to invest. I’ve been working away to get the money to me, get set up with Waterhouse, etc. My big moment arrived…and the loonie fell dramatically.
I know we’re not to try to time the market, and I know it’s generally better to invest a lump sum earlier vs dollar cost average it over a future period.
But. I’m still perplexed.
Do I allocate this much money right now while the loonie is so low relative to US? Or not?
On the one hand it seems like “yes because we never know what’s going to happen any which way and when” and because the better gains of the US market is considered in percentage, so a 10% gain, for example, is a 10% gain regardless of whether I could buy 80 or 100 shares on a given day. This said, is there any silliness in using CAD to buy US stocks right now? Do I break from the standard recommendations (e.g., “get lump sum in as early as possible”) in this case?
@Tara: Some thoughts on this subject:
https://canadiancouchpotato.com/2013/05/28/ask-the-spud-should-i-buy-in-now/
https://canadiancouchpotato.com/2013/05/31/does-dollar-cost-averaging-work/
An important thing to consider: if you are nervous about investing the lump sum now, do you see a point in the future where there will nothing in the markets or the economy to worry about?
https://canadiancouchpotato.com/2013/02/07/scary-when-theyre-down-scary-when-theyre-up/
Hi CCP, slightly off topic but your reply to @Cam included the folly of waiting for Vancouver housing prices to crash.
As someone who’s just entering their 30’s, what advice would you have for those deciding btw saving for a house (in Vancouver) and investing for the long term. I have the good fortune of having been given a large amount of money and I’m finding it’s a challenge to figure out if I should just invest it all in equities and continue renting (my wife would not be pleased), put it all towards a down payment on a house with the fear that a real estate crash could set me back severely, or invest a small amount in equities but have the majority in cash waiting until either the housing market crashes or I have enough downpayment.
Do you think there is a role for investing all in equities until a market crash may or may not occur?
@Jamie:
> What does this mean? “Currencies have (theoretical) economic equilibrium value against each other.”
You might find The Economist’s “Big Mac index” a useful primer: http://www.economist.com/content/big-mac-index
Hello
I was looking at XPF, as a diversified source of income. Unfortunately the U.S. Portion of it is hedged.
Is there a non-hedged, CAD purchasable similar ETF? The selection of USD preferreds from Canada seems limited.
Thank you
@David: If you consider preferred shares to be fixed income investments (and many people would) then it probably makes sense to use hedging on US preferreds. Remember, the reason to hold US preferred shares (or US bonds) is to provide incrementally higher yield than you would get from Canadian preferreds alone. This small difference could be overwhelmed by currency fluctuations, which adds risk without reward. I discuss this idea here:
https://canadiancouchpotato.com/2012/03/01/ask-the-spud-should-i-hold-us-bonds/
Somewhat related currency question. If VUN is the CAD equivalent of VTI, is there a identifiable drag on the returns of VUN to reflect the costs of exchanging it’s valuation from USD to a rendering in CAD? Suppose on some day when the CAD and USD are at par one checks the price for VTI and finds that it is $100. Even though the currencies are traded at par we should expect VUN to be something less shouldn’t we? How much less and is it predictable?
@Jerry: I’m not sure what you mean by “the costs of exchanging its valuation from USD to a rendering in CAD.” VUN simply holds VTI, so the calculation of its net asset value is simply expressing VTI’s value in Canadian dollars. There’s no cost to this math. VUN should be expected to underperform VTI slightly due to its higher MER and withholding taxes, but that’s all.
Re hedging : if a Canadian investor were purchasing a Canadian etf that holds US equity , and that etf is available as a hedged version , and a second etf is available as an unhedged version of the hedged etf , then would purchasing the hedged version of the etf , result in the investor buying more US equity than if the investor bought the unhedged version of the etf ? Since the value of the Canadian currency in the hedged etf should have held it’s own relative to the US dollar. Whereas the Canadian dollar in the unhedged version is now less than 80 cents US . Or is my understanding of hedging faulty ? Any comments to help me understand this would be appreciated . Thank You .
Perhaps I could state that in a different way…. Once again, supposing both currencies to be at par, imagine that I I hold VUN and decided I would like to sell $10,000 of the fund. Vanguard dutifully goes out and liquidates a suitable amount in VTI to satisfy my demands but wouldn’t they need to sell something more than $10,000 of VTI in order to cover the cost of converting the USD to the CAD they are going to give to me?
@JDR: If two investors were to buy VUS (hedged) and VFV (unhedged) on the same day, they would have equal amounts of US equities. However, the buyer of VUS would also own a currency forward (at trivial cost) whose future value is unknown. In a few weeks or months, the value of these two ETFs may be quite different, because the net asset value of VUS will always be the value of the stocks plus (or minus) the value of the currency forward. So the two funds have equal equity exposure, but the hedged ETF also has a second asset that needs to be considered in the calculation.
@Jerry: The cost of currency conversion for an institution like Vanguard (unlike for you or me) can be neatly rounded to zero, so this is not an issue.
I purchased some TDB952 US Index e US$ funds when the Canadian dollar was at par. My thought at that time was given that I plan to spend 3-4 months of the year in the US during retirement, why not purchase some US $ funds while the Can $ is at par rather than waiting until I’ retired to purchase the US cash. Is this strategy sound? Can I actually draw down the funds in US$ when I retire or will these funds be converted to Canadian dollar equivalent during draw down?
@Blair: You should be able to redeem units of this fund and receive the proceeds in US dollars, but I would call TD before doing so to make sure. However, if your goal was simply to get USD exposure when the exchange rate was favourable you could have done that with a CAD-denominated fund of US equities. This would not provide you with US cash when you sell the units, but you would still benefit from the appreciation of the US dollar:
https://canadiancouchpotato.com/2014/01/13/how-a-falling-loonie-affects-us-equity-etfs/
Thanks for your speedy reply! My goal was simply to flip some of my US equity funds held in Cad$ into US equities held in US$ so that I could basically buy some US$ in my registered account while the loonie was at par and then draw down the US$ when I head south during retirement. In this manner I will not have to purchase US$ each season that I head south.
Thanks for your online advice on index investing. Approximately 6 years ago, I subscribed to the TD e series portfolios that you promote. Returns have been impressive thus far. Can you help me understand how the TD E series bond fund does so well? Over 8 % last year! What do you think the outlook is for this fund going forward?
Thanks so much for the response, including links, above. You were reiterating what I’ve learned (largely from your site), and it was very helpful to hear that even in light of the variables I was wondering about.
I’m not sure where to post this question, but: Do you have any articles on why to invest in Canadian stocks at all? It seems the US returns are consistently higher in the long term, I can’t make use of my current amount in the Canadian housing market, I don’t need the money for anything else for a good 20 years, and I don’t need/benefit from Canadian tax reliefs. Am I missing any other reason I might still want 30% of my portfolio in Canadian stocks?
@Tara: The long-term expected returns on US, Canadian and international stocks should be the more or less the same. Don’t be fooled by the last few years. It’s actually interesting to hear people say this now: it wasn’t so long ago that most investors believed Canada was the only place to invest. I had some fun with that idea in a post three years ago:
https://canadiancouchpotato.com/2011/02/09/the-u-portfolio/
:) I get that the U article was satire, but it too seemed to be saying “don’t put all of your eggs in the basket called Canada, be sure to invest globally.” That’s precisely what I’m wondering about. 30% in Canadian stocks seems very high. It was the 20-year number at http://www.taxtips.ca/stocksandbonds/investmentreturns.htm that prompted me to ask why Canada? There it looks like short term and long term over the past 20 years S&P CAD returns have been much lower than S&P 500 US. What are your thoughts in relation to those numbers?
Also, your article said: “…a rising loonie would harm returns. For Canadians who held unhedged foreign equities, the worst period in recent times was 2002 through 2007, when the Canadian dollar soared from about $0.63 to over $1.02 USD. During those six years, the S&P 500 returned over 6% annually in US dollars, but lost about 2% a year in Canadian-dollar terms.” How does the rising loonie effect an 8% discrepancy in returns?
@Tara: 20 years is actually not “long-term” when it comes to stock returns. If you go back 40 years you’ll find the returns of US, Canadian and international stocks are almost the same. Remember too most investors can’t think in even 20-year time frames. Believe me, if Canada outperforms over the next three years everyone will be asking the opposite question: “Why wouldn’t I just put all my money in Canada?” Holding roughly equal amounts of all three asset classes removes the guesswork and offers some opportunity to boost returns by rebalancing (i.e. buying low, selling high).
Regarding the differences in returns due to currency, if the US dollar falls in value relative to the loonie, the value of your US stocks go down. As a Canadian, your total return on US equities is the return on the stocks multiplied by the return on the currency. So if US stocks returned 6% and the US dollar depreciated -7.6%, you would end up with a return of about -2%:
= (1 + 0.06) * (1 – 0.076) – 1
= (1.06) * (0.924) – 1
= -2.06%
Is there a case where using the hedged version wins? It seems to me like every article I read they tell people not to hedge:
If CAD depreciates—>non-hedged version wins
If CAD appreciates–>well the hedging has a high tracking error so the benefit might even be non-existent.
If this is the case, why would there be any investments into the hedged version at all?
@Steve: It’s not quite that cut and dried. If the CAD appreciates significantly but gradually over a couple years then a hedged ETF will probably deliver better returns. Even if it exhibits large tracking error it may still do better than the unhedged version. Hedging tends to disappoint over the longer term, or during periods when currency movements are very volatile.
You wrote “It would be ideal if we could turn currency hedging on and off at the right times”, which begs a Q I’ve wondered about that may or may not be related — is there an ETF index fund that tracks the S&P 500 (or another major index) that is a good candidate for Norbit’s gambit? I keep most of my money in an S&P ETF and employ NG intermittently (usually with DLR and DLR.U) but I hate the fact that between waiting for funds to settle, journaling shares over, etc, big chunks of my savings are left uninvested for 5-7 trading days.
It would be ideal if there were an ETF index fund with both $C and $U sides, which would (i think?) allow people to do exactly what we both want: flip-flop our diversified index investment into and out of CAD/USD at will, right?
Do you know of any funds that would be good candidates? I’m partial to the S&P 500, but I’d be happy enough to find an ETF for ANY major index that could be used with NG. BMO had what appeared to be the perfect vehicle in ZSP and ZSP.U, but for some odd reason they don’t share the same CUSIP, and hence you can’t use NG with them.
Great article Dan
With 15-20 years before retirement, we’re definitely staying the course unhedged given the various reasons in this article, but with our kids’ RESP, I’m not as confident.
We have two kids 7 & 9 with a couch potato portfolio, the US/Intl components unhedged (VUN/XEF). I’ve been debating whether to just stay the course or consider either 50% hedged/unhedged or even 100% hedging (VUS/XFH) given the duration before use and short window for depletion relative to retirement money.
I also realize that as we get closer to usage, will have to start depleting the equity component and moving to more fixed income so the window is even shorter.
Any thoughts on this are appreciated
@WealthManager: I look at it like this: if your time horizon is long enough to take equity risk, then it is long enough to take currency risk. If you have a short-term obligation in Canadian dollars (for example, your child starts university in three years), then that money should be in fixed income.
I’m curious. I already own a hedged to Canadian US market fund purchased a year and a half ago, when the Canadian dollar was a good bit higher. Now I’d like to sell it and instead purchase an unhedged US market fund in US dollars. Will I come out even currency-wise (more or less)? If not, what would be an optimal way to make the switch?
@Eva: I’m not sure what you mean by “come out even.” Right now you have no exposure to the US dollar. If you switch to an unhedged ETF, you will have exposure to the US dollar going forward. So if the US dollar rises in the future, you will be better off with the unhedged fund. If the Canadian dollar rises, you would have been better off keeping the hedged ETF.
The loonie is flying under 75 cents and I have a large paper gain in my non-registered account owing to it’s rapid fall. With more cash now available to invest I am tempted to buy hedged ETFs for the first time. Specifically I am considering a target ratio of 50-50 hedged to unhedged to significantly reduce the currency risk. But I’m concerned about the tracking error as reported in Justin’s article. If there is nothing to be gained when the Cdn dollar rises and much to lose when it declines, then what is the point of ETFs being available hedged altogether?
@Brian: Currency hedging might work over some periods: the results are not guaranteed to be as bad as they were during the period Justin looked at it. But the track record of currency hedged funds is not good. I would also point out that currency hedging (despite popular belief) does not actually reduce the overall risk in a portfolio. Remember that if stocks experience a global downturn, exposure to the US dollar often helps. By hedging this exposure you run the risk of even greater losses:
https://canadiancouchpotato.com/2014/03/06/why-currency-hedging-doesnt-work-in-canada/
Hi Dan
thank you for providing us with all this great information.
One question, I have my RRSP account with Questrade in US dollars and I was buying VTI ETF and I was planning to continue buying more but because Canadian dollar is so low should I consider buying VUN instead of VTI.
Thanx
@Jozo: Here’s why that won’t work:
https://canadiancouchpotato.com/2014/01/13/how-a-falling-loonie-affects-us-equity-etfs/
Hi Dan
I just watched a show on BNN called Bermans call with Larry Berman. He strongly recommended hedging and said now is a good time to hedge. One of his articles said anytime below 80 cents its worth it to hedge.
I m not second guessing you. (Well maybe a little because I saw him on TV!). Would he have some agenda to recommend hedging or does he just not know that its not always beneficial.
Would be interested to hear.
Thanks
@John R: Gurus may not have a vested interest in the strategy they recommend, but they have a vested interest in making investors second-guess themselves. And they are very skilled at it.
It is a potentially good time to use hedging during any period that the CAD moves up in value. And sure, it seems reasonable enough to assume that with the CAD at $0.70 USD it is more likely to go up than down. But Larry Berman and the other gurus on the BNN have no idea where the loonie is headed, no matter how confident they seem. A reminder that interest rates have had “nowhere to go but up” for about eight years now, and yet they seem to keep ticking down.
Could hedging work well over the next few years? Sure it could. But as I point out in the blog, sometimes the products do not track the currency as well as they should. Moreover, it is too easy to fall into a pattern of turning the hedge on and off as you predict currency movements: you will likely be wrong at least as often as you are right, while incurring costs and potentially taxes with every move. I feel it is better to stick to a discipline strategy and rebalance as necessary.
That advice never makes it on BNN because it’s boring.
OK thanks for reply.
When the dollar went from par to 90 cents I thought it would be smart to hedge then because of the big drop. I’m glad I stayed the course. Would have missed out on the 90 cent to 70 cent drop. Ill just keep rebalancing once or twice a year…
I was looking to diversify my bonds to have international bonds as well as Canadian, but unlike securities, the only international bond ETFs Vanguard has (VBG, VBU) are still CAD hedged. I don’t like the idea of diversifying equities according to market but keeping all my bonds in Canada. Is it still worth diversifying bonds even if the international ones are hedged?