Canadian Money Forum banner

Hedging against foreign currency risk

3K views 12 replies 12 participants last post by  humble_pie 
#1 ·
Let's say I want to invest in an american company on NYSE with a very long term time horizon. Assuming that I want to limit the risks associated with exchange rates between CAD and USD, what is the best way to hedge agaisnt this risk?
 
#2 · (Edited)
Personally, my approach is to go ahead and diversify my holdings between US and CAN currency. Currency diversity IS my hedge.

There are numerous CAN$ hedged US funds around and in every case the currency hedging is a greater drain on performance than any possible benefit. Most folks on here will advise to just go with the $US denominated versions and not bother with the currency hedged version.

EDIT: have a look at some of these articles:
http://canadiancouchpotato.com/category/foreign-currency/
 
#3 ·
Right. There are approaches to hedge away the currency and make American stocks act as if CAD/USD is fixed at 1.0, but over the last decade or so we've seen that the cost of this hedging is very high. It introduces a performance drag that is very significant and most of us (myself included) don't think it's worth the cost.

Foreign currency exposure is good. Most of us have too much Canadian exposure, meaning all our exposure is in CAD. If our currency weakens significantly, as it has it in the past, you will be thankful that you have US and other foreign exposure.
 
#5 ·
Right. There are approaches to hedge away the currency and make American stocks act as if CAD/USD is fixed at 1.0, but over the last decade or so we've seen that the cost of this hedging is very high. It introduces a performance drag that is very significant and most of us (myself included) don't think it's worth the cost.
Is the cost of hedging really 'very high'? If I look at Vanguard Canadian ETFs, it shows a MER for VUS & VUN both as 0.16%. Same with VSP and VFV, which are their S&P 500 ETFs at 0.08%.
https://www.vanguardcanada.ca/individual/etfs/etfs.htm

They both track the US Total Market Index but VUS is hedged whereas VUN isn't. I'm not saying hedging (or not) is the correct thing to do, as I don't know where the currencies are going, but it seems to me like the cost of hedging may not actually be that high - at least for US ETFs.
 
#6 · (Edited)
MER doesn't show the full cost of hedging, instead look at total return. Hedging is an imprecise activity because they do this by using foreign exchange derivatives. These have to be traded on the open market, so they involve trading costs, and there's the imprecision of matching the hedging instrument to the current size of the fund.

Example, XSP (currency hedged S&P 500) vs IVV (the underlying security). If hedging was working perfectly, you'd expect the performance both in the CAD and USD versions to be equal because they hold the same security, IVV.

XSP: 10 year performance 5.40% ( ... note, til end of Dec )
IVV: 10 year performance 6.89%

You can see that the drag of XSP is 1.49% per year. About 5 basis points of that is due to MER differences (unfortunately this has varied over the years which complicates this comparison).

Even taking into account extra MER on the Canadian fund, that's still over 1.40% annual performance drag due to currency hedging!
 
#8 ·
If you believe in the company, what's wrong with borrowing the money, in USD$, to invest in the company?

You get a natural currency hedge out of it, and when its time to sell, you aren't worried about converting the proceeds (except your gains) from USD$. Nor do you have to buy USD$ up-front.

Over time, if the stock goes up, the hedging becomes reduced.
 
#10 ·
If possible should hold every major currency of each continent plus bitcoin, gold, silver if rich enough not all gold & silver held in same country. Fiat currencies come & go, With technology advances & it becomes practical to be able to rearrange atoms to make gold & silver then holding them might do much good. Cycles always turn & we could turn away from technology to that of the dark ages.
 
#12 ·
A few years ago when the Canadian dollar was at par with US dollar, I bought Enbridge US$ rate reset preferred shares. This was done to help pay for fixed expenses in US$ related to ownership of a condo in Arizona. While the market value of these shares dropped significantly in the past year, it has now increased due to the increase in interest rates. An interesting feature is that the reset is based on US 5 year bond rate which is higher than the Canadian rate. Since the dividend payments are from a Canadian corporation, they qualify for the dividend tax credit. Also no form 1135 issues.
 
#13 ·
there's FXC, an ETN that seeks to reflect the value of the canadian dollar as expressed in USD. Closed friday at 74.06.

FXC has options, so a party could hedge USD by continuously purchasing puts or by setting up some kind of option spread.

however a glance at the FXC option tables shows low open interest in any of the options, which suggests that institutions are not regularly playing in FXC.

would i, myself, hedge with FXC options or any other kind of FXC position? absolutely not, it's far too expensive. If an investor is that afraid of currency fluctuation, then perhaps it's fair to say he should not buy US securities in the first place.

otherwise, merely owning some US securities - preferably in an RRSP so their dividends will flow without NR withholding tax - is a reasonable enough hedge in itself, imho.

.
 
This is an older thread, you may not receive a response, and could be reviving an old thread. Please consider creating a new thread.
Top