As the loonie takes flight against the US dollar, many Canadian investors with US currency exposure are now wondering: is it a good idea to go for currency hedging?
“It is a bit of an esoteric question,” said Horizons Vice President and Head of Sales Strategy Mark Noble in a BNN interview. “Over the long term, it’s usually better to not hedge because of the diversification benefits, particularly when we’re looking at something like the US dollar. This year was a bit of an aberration.”
He explained that for a multi-year period, investors have been reaping rewards from dollar-denominated, non-hedged ETFs. In structuring portfolios, there are two main aims: to get the asset class call right, and to have added diversification.
“One of the most important and interesting things for investors to realize too about the US dollar is that it’s mostly inversely correlated to the Canadian dollar,” he said. It therefore increases diversification; Canadian equities would benefit from the rise in the loonie, and having US equities in one’s portfolio would be a good way to hedge over the long term.
As Canadians with dollar-denominated funds take a beating, there’s a lot of temptation to jump to currency-hedged funds, which is easy enough to do. “Most ETF providers that have hedged and non-hedged versions allow you to do commission-free switching between those… people are really trying to play that movement.”
However, Noble explained, things get trickier when foreign currency exposure beyond the US dollar is considered. “When you’re looking at Australia [and the loonie], for example, well those two currencies tend to move in tandem, so I probably don’t want to be hedged.” Dividend-paying ETFs present a further complication, as one would need to look at tax implications.
In light of such complications, it may be beneficial for investors to look at actively managed ETFs, whose managers can switch between hedging and non-hedging strategies.
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