US ETFs vs. Canadian ETFs holding US ETFs - currency conversion

joshmclean75 · 11-07-2009, 03:25 PM

I currently hold XSP, XIN, and CWO in my RRSP. I plan to switch these over to VTI, VEA, and VWO to take advantage of the lower MERs. Is the savings on MERs really worthwhile if I'm wasting money once a year on currency conversion?

leslie · 11-08-2009, 12:28 PM

The currency convertion would wipe out multiple years' worth of the MER difference. But the issue you should be addressing is the FX risk. I'm pretty sure those Cdn ETFs are currency hedged. When you buy the US funds you have to do your own hedging.

I can assure you that the extra MER pays for itself many times over by taking that problem away. If you REALLY want to do your own hedging learn here.

joshmclean75 · 11-10-2009, 11:11 PM

Quote:

Originally Posted by leslie

The currency convertion would wipe out multiple years' worth of the MER difference.

OK. I don't get it then. If the currency conversion will wipe out the MER difference, why are so many people advocating ETFs like VTI and VEA over their Canadian equivalents?

ChrisR · 11-11-2009, 12:44 AM

One argument is that the lowers MERs will make up for the currency conversion over the long term.

I do agree with you that the cost of currency conversion seems to defeat the benefit of lower fees. The main reason I am interested in the american ETFs is that they offer great variety, without currency hedging. Right now I think that every Canadian, low MER emerging markets fund uses hedging, which will likely eat away returns over the long term. (I'm not sure if the new BMO fund hedges or not, but if it does not I will be looking at that instead of VWO).

Eric · 11-11-2009, 04:36 AM

The Claymore CMW Global Mining is not hedged, I believe. Its MER is 0.55%. I picked it because it gave me exposure to non-North American currencies and to commodities. It gave me a return of 12% in 3 months.

The Claymore CIE International Fundamental Index is not hedged. Its MER is 0.65%. It gave me a return of 14% in 4 months.

The Claymore BRIC CBQ, is hedged against the US $. However, my understanding is that it is not hedged against the base BRIC currencies. I am not sure of that. Could someone confirm? Its MER is 0.60%. It gave me a return of 8% in less than 2 months.

Their MER are relatively high for ETFs but they are not completely passive indexes.

Sorry if this sounds as an advertising for Claymore. Actually, I have much more iShares than Claymore's.

CanadianCapitalist · 11-11-2009, 10:13 AM

Quote:

Originally Posted by joshmclean75

I currently hold XSP, XIN, and CWO in my RRSP. I plan to switch these over to VTI, VEA, and VWO to take advantage of the lower MERs. Is the savings on MERs really worthwhile if I'm wasting money once a year on currency conversion?

XSP, XIN & CWO don't just hold US assets. They hold US ETFs and put a currency hedge on top of it.

There are many implications of this. I've discussed this endlessly on the blog:

http://www.canadiancapitalist.com/?s=hedging

The bottomline is VTI, VEA and VWO will most probably be cheaper to own over the long term. Check out the posts and then fire away your questions.

Eric · 11-11-2009, 09:05 PM

I have found your blog very informative. Thanks.

I have a question though. Claymore have stated that :
"the USD hedge is a very strong proxy hedge to the individual currencies of the emerging countries".

I don't understand that. If the US $ drops, and the Chinese Yuan goes up, how can the hedging against the the drop of the US compensate for the rise in the Yuan. I was thinking that buying the BRIC CBQ would give me exposure to BRIC currencies. Am I totally wrong? Do you know of other ETF's that do provide unhedged exposure to BRIC currencies?

leslie · 11-12-2009, 08:11 AM

To determine your expected exposure use the UBC currency plotter.
http://fx.sauder.ubc.ca/cgi/fxplot?b...g&a=lin&m=0&x=

Since Jan 2002 world currencies have almost all taken either one of two possible paths. Either the countries 'manage' their currencies to keep their US exchange rate stable (like Korea), or they have let their currency float (Cdn, Brazil, etc).

The quote states that the emerging country currencies have all pegged to the US dollar, so that the Loonie/USdollar exchange was/is the same as the Loonie/Theircurrencies exchange. Like you see Korea on the graph. I do not believe their position is accurate for most other currencies, as you can see from the graph.

If you WANT exposure to the individual currencies of the emerging countries, then convert your Loonies to USdollars. Then use the USdollars to buy the US listed ETFs of emerging countries.

The Claymore product you quoted hedges the Loonie/USdollar exposure, NOT the exposure you actually have to the individual country's currency. Your return will be the same percent as the percent return an American would get from the same investment. From a Canadian's POV, you will have a LONG exposure to the emerging currencies (from holding the foreign operations), plus a SHORT exposure to the USdollar (from the 'not-really-a-hedge) layered on top.

CanadianCapitalist · 11-12-2009, 10:06 AM

Quote:

Originally Posted by Eric

I have found your blog very informative. Thanks.

I have a question though. Claymore have stated that :
"the USD hedge is a very strong proxy hedge to the individual currencies of the emerging countries".

I don't understand that. If the US $ drops, and the Chinese Yuan goes up, how can the hedging against the the drop of the US compensate for the rise in the Yuan. I was thinking that buying the BRIC CBQ would give me exposure to BRIC currencies. Am I totally wrong? Do you know of other ETF's that do provide unhedged exposure to BRIC currencies?

I'm not sold on the claim that a CAD/USD hedge is a proxy for CAD/emerging market currencies hedge either.

CBQ has the same problem as CWO. It holds US-listed ADRs and a CAD/USD hedge on top of it. What you get the unhedged USD exposure to emerging market currencies less tracking error. I'm not sure why Canadians would want this. I think there are ETFs devoted to BRICs trading in the US but I'm not familiar with them. My personal opinion is that BRIC investing is just a fad.

leslie · 11-12-2009, 04:51 PM

My way of dealing with this is to not buy basket ETFs. I buy individual country ETFs (US issued) and then decide whether their currency is tracking 'the-rest-of-the-world' (no hedge required) or the USdollar (hedge with USdollar hedge).

So I own :
N-PIN India and have a 1:1 short position on the USdollar as its hedge.
N-EEM which tracts the HongKong market regardless of what it says, so I hedge it with short USdollars.
N-EWZ Brazil whose currency is stronger even than the Loonie so does NOT need any hedge.

11-07-2009, 03:25 PM	#1
joshmclean75 Junior Member Join Date: Nov 2009 Posts: 4	US ETFs vs. Canadian ETFs holding US ETFs - currency conversion I currently hold XSP, XIN, and CWO in my RRSP. I plan to switch these over to VTI, VEA, and VWO to take advantage of the lower MERs. Is the savings on MERs really worthwhile if I'm wasting money once a year on currency conversion?

11-11-2009, 04:36 AM	#5
Eric Junior Member Join Date: Oct 2009 Posts: 28	Some Claymore's ETF are not hedged. The Claymore CMW Global Mining is not hedged, I believe. Its MER is 0.55%. I picked it because it gave me exposure to non-North American currencies and to commodities. It gave me a return of 12% in 3 months. The Claymore CIE International Fundamental Index is not hedged. Its MER is 0.65%. It gave me a return of 14% in 4 months. The Claymore BRIC CBQ, is hedged against the US $. However, my understanding is that it is not hedged against the base BRIC currencies. I am not sure of that. Could someone confirm? Its MER is 0.60%. It gave me a return of 8% in less than 2 months. Their MER are relatively high for ETFs but they are not completely passive indexes. Sorry if this sounds as an advertising for Claymore. Actually, I have much more iShares than Claymore's.

11-11-2009, 09:05 PM	#7
Eric Junior Member Join Date: Oct 2009 Posts: 28	USD hedge vs hedge to emerging currencies I have found your blog very informative. Thanks. I have a question though. Claymore have stated that : "the USD hedge is a very strong proxy hedge to the individual currencies of the emerging countries". I don't understand that. If the US $ drops, and the Chinese Yuan goes up, how can the hedging against the the drop of the US compensate for the rise in the Yuan. I was thinking that buying the BRIC CBQ would give me exposure to BRIC currencies. Am I totally wrong? Do you know of other ETF's that do provide unhedged exposure to BRIC currencies?

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11-08-2009, 12:28 PM	#2
leslie Senior Member Join Date: May 2009 Posts: 376	The currency convertion would wipe out multiple years' worth of the MER difference. But the issue you should be addressing is the FX risk. I'm pretty sure those Cdn ETFs are currency hedged. When you buy the US funds you have to do your own hedging. I can assure you that the extra MER pays for itself many times over by taking that problem away. If you REALLY want to do your own hedging learn here.

11-11-2009, 12:44 AM	#4
ChrisR Member Join Date: Jul 2009 Posts: 45	One argument is that the lowers MERs will make up for the currency conversion over the long term. I do agree with you that the cost of currency conversion seems to defeat the benefit of lower fees. The main reason I am interested in the american ETFs is that they offer great variety, without currency hedging. Right now I think that every Canadian, low MER emerging markets fund uses hedging, which will likely eat away returns over the long term. (I'm not sure if the new BMO fund hedges or not, but if it does not I will be looking at that instead of VWO).

11-12-2009, 08:11 AM	#8
leslie Senior Member Join Date: May 2009 Posts: 376	To determine your expected exposure use the UBC currency plotter. http://fx.sauder.ubc.ca/cgi/fxplot?b...g&a=lin&m=0&x= Since Jan 2002 world currencies have almost all taken either one of two possible paths. Either the countries 'manage' their currencies to keep their US exchange rate stable (like Korea), or they have let their currency float (Cdn, Brazil, etc). The quote states that the emerging country currencies have all pegged to the US dollar, so that the Loonie/USdollar exchange was/is the same as the Loonie/Theircurrencies exchange. Like you see Korea on the graph. I do not believe their position is accurate for most other currencies, as you can see from the graph. If you WANT exposure to the individual currencies of the emerging countries, then convert your Loonies to USdollars. Then use the USdollars to buy the US listed ETFs of emerging countries. The Claymore product you quoted hedges the Loonie/USdollar exposure, NOT the exposure you actually have to the individual country's currency. Your return will be the same percent as the percent return an American would get from the same investment. From a Canadian's POV, you will have a LONG exposure to the emerging currencies (from holding the foreign operations), plus a SHORT exposure to the USdollar (from the 'not-really-a-hedge) layered on top.

11-12-2009, 04:51 PM	#10
leslie Senior Member Join Date: May 2009 Posts: 376	My way of dealing with this is to not buy basket ETFs. I buy individual country ETFs (US issued) and then decide whether their currency is tracking 'the-rest-of-the-world' (no hedge required) or the USdollar (hedge with USdollar hedge). So I own : N-PIN India and have a 1:1 short position on the USdollar as its hedge. N-EEM which tracts the HongKong market regardless of what it says, so I hedge it with short USdollars. N-EWZ Brazil whose currency is stronger even than the Loonie so does NOT need any hedge.