# Switching from XSP (hedged) to ZSP



## james4beach (Nov 15, 2012)

XSP is the iShares CAD-hedged S&P 500 index fund.
ZSP, XUS, VFV are unhedged S&P 500 index fund, but trade in Canadian dollars.

The hedged ETFs like XSP were quite popular until people (actually one of this forum's founders) discovered that currency hedging results in poor tracking and a performance drag over time. It's probably not worth using hedging:
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/

Years ago, I helped my parents set up an ETF portfolio that includes XSP. They've held it since then for a healthy gain but I think they will be better off in an unhedged index, probably ZSP because it's the largest fund size and daily volume.

I'm wondering what might be a good strategy for switching XSP --> ZSP.

One thought is that there's no hurry to incur that 15k cap gain. Because XSP contains a USD short position, they could wait for the USD to weaken. e.g. wait for USDCAD closer to 1.20 and then sell XSP and buy ZSP. The problem here is, how many years does one wait for this? In the mean time you're losing performance.

What do you think? Is it a good idea to wait for the USDCAD rate to decline before making this switch?


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## zylon (Oct 27, 2010)

I can see USDCAD 1.30 happening any time.
But 1.20 might be a very long wait.

http://stockcharts.com/h-sc/ui?s=$USDCAD&p=W&yr=4&mn=0&dy=0&id=p19500280397


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## james4beach (Nov 15, 2012)

Thanks, that's a very nice link to the chart. I see you used a 500 day simple moving average... interesting. When framed that way, it looks like USDCAD is unlikely to go down


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## zylon (Oct 27, 2010)

For what it's worth, people who are a lot smarter than I, believe USD has entered the 'sell' zone.



> While most investors wonder if the dollar is beginning a new leg higher, Barron’s master analyst Shuli Ren wonders if it’s time to unwind long positions!
> 
> I think so, (...) On Friday, I sold the bulk of my long dollar/short yen position at the 110 price level.
> 
> ~Stewart Thomson


http://www.321gold.com/editorials/thomson_s/thomson_s_112216.html


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## james4beach (Nov 15, 2012)

Let's say it's impossible to predict currency directions, and we don't know which way USDCAD will go, but we expect that it will fluctuate a bit.

Then does that mean you might as well switch XSP to ZSP immediately?


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## zylon (Oct 27, 2010)

For a long-term investment - not a trade - *CC* knows best.



> So, what should investors do? If past performance is any indication and if investment performance is the only consideration, it appears that investors will likely be better off obtaining direct exposure to foreign equities without hedging away currency exposure.


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## james4beach (Nov 15, 2012)

Yes I agree long term but I'm wondering if I should somehow time my transition optimally. Or am I overthinking this?

I would just feel a bit dumb selling XSP today because USDCAD is in one of the strongest periods it's had in a long time.


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## peterk (May 16, 2010)

Why not just put all new money towards ZSP, and leave XSP alone? If in future years fluctuations make it feasible to sell with minimal tax, switch then.


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## doctrine (Sep 30, 2011)

I use VFV. There is virtually no transparency on the actual hedging, and no performance measurements. The only way to tell is via the tracking error, which is not even reported. In the long run, holding VCN and VFV unhedged will work out.

<edit> I just wanted to add, on average Canadians hold far too much Canadian assets, especially if you have real estate. There's no reason to hold the S&P 500 in Canadian dollars. Have some US assets. If the Canadian dollar does well, you'll do well. If not, and the Cdn dollar collapses, you have something to fall back on.


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## james4beach (Nov 15, 2012)

peterk said:


> Why not just put all new money towards ZSP, and leave XSP alone? If in future years fluctuations make it feasible to sell with minimal tax, switch then.


That's a good idea. So you think that leaving XSP alone is defendable? I suppose it's possible for the CAD to strengthen in the future, which would make XSP a good choice.


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## peterk (May 16, 2010)

^ I dunno... Guesswork on the currency fluctuation is just that. Shouldn't you be comparing known (estimated) performance drag on XSP vs. known tax bill for selling. What are both as a % of the total position?

And CADUSD would go up if oil goes up and markets don't crash in the next couple years. As likely a scenario as any other. Holding some of both funds would be hedging your bets in any case.


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## AltaRed (Jun 8, 2009)

Most of the 'fall' in the loonie is likely done. Hindsight being 20-20, it would have been much better to have been in ZSP 2 years ago. The question now is partly: 1) is there more risk of a further slide in the loonie vs a strengthening, and partly 2) who cares if that bullet is going to be bit at some time anyway. Generally, I think the Canadian economy will stall regardless of how much money Ottawa throws at the wall and partly because we will have some trade disruption with the USA, but I think increased volatility in the US economy may also slow US GDP growth and thus weaken the greenback. It's a tough call. I've never been hedged in my entire investing life so I take my chances. But your parents might be more uncomfortable if their ZSP ETF value stalls for multiple years due to a gradual creep upward of the loonie. Maybe this is a move that should wait a bit, i.e. get the other things in place first.


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## mordko (Jan 23, 2016)

Hedging is an attempt to time the currency market. A very hard thing to do at any time, but right now... Impossible. 

By buying shares you are buying assets. If your currency value drops than the price of assets goes up when calculated in that currency (ignoring all the other short term factors, but long-term this is correct). In this respect you are already "hedging" by not having your CAD sitting as cash under your pillow.


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## My Own Advisor (Sep 24, 2012)

doctrine said:


> There's no reason to hold the S&P 500 in Canadian dollars.


Agreed. Own US assets in USD where you can, inside your RRSP.


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## AltaRed (Jun 8, 2009)

My Own Advisor said:


> Agreed. Own US assets in USD where you can, inside your RRSP.


There are legitimate reasons to hold the S&P500 in CAD. Foremost among them is the relative inefficiency for most investors to convert currency on an ongoing basis and/or lack of knowledge to do an NG (e.g. J4B's parents). A second is US estate taxes for large portfolios unless held in a CCPC. For most investors DCA'ing their portfolios, or SWR'ing withdrawals, forex conversion can be problematic. Don't denigrate those picking CAD equivalents.


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## doctrine (Sep 30, 2011)

AltaRed said:


> There are legitimate reasons to hold the S&P500 in CAD. Foremost among them is the relative inefficiency for most investors to convert currency on an ongoing basis and/or lack of knowledge to do an NG (e.g. J4B's parents). A second is US estate taxes for large portfolios unless held in a CCPC. For most investors DCA'ing their portfolios, or SWR'ing withdrawals, forex conversion can be problematic. Don't denigrate those picking CAD equivalents.


If you own VFV on the TSX, you literally never have to worry about currency conversions. It effectively moves with the US currency; if the S&P is flat but the US dollar is up, VFV will move up.


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## My Own Advisor (Sep 24, 2012)

VFV is still hit with withholding tax, no?

Not putting down folks that only hold CDN assets. Estate taxes are only an issue for the 1% of the 1%.


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## james4beach (Nov 15, 2012)

Wait, unless we're talking about different things, owning ZSP or VFV *is* owning US assets with USD exposure.

The fund trades in CAD on the Canadian exchange but this doesn't change the fact that the underlying are all pure USD assets. As an additional benefit of having it domiciled in Canada, you are exempt from estate tax requirements including having to file a US report with over $60,000 in assets.

I think ZSP, VFV and XUS are very attractive for this reason: Canadian domiciled, conveniently traded in CAD, but pure US assets with total USD exposure


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## My Own Advisor (Sep 24, 2012)

Totally agree James, if you don't want to own US assets directly, holding them indirectly via CDN domiciled ETFs is still very good.


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## OrangeGreen (May 6, 2018)

I came here looking for answers to the hedging question, in general, and I think I'm more confused. 


What about withholding tax?
What about dividends/distributions?


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## AltaRed (Jun 8, 2009)

Hedging simply is the mechanism to take out the effect of CAD/USD currency exchanges. There is a small cost for the ETF to 'buy' currency change (not unlike insurance) protection. There is still 15% withholding taxes and the ETF stlil generates distributions.


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