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



## joshmclean75 (Nov 4, 2009)

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?


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## leslie (May 25, 2009)

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.


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## joshmclean75 (Nov 4, 2009)

leslie said:


> 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?


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## ChrisR (Jul 13, 2009)

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).


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## Eric (Oct 20, 2009)

*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.


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## CanadianCapitalist (Mar 31, 2009)

joshmclean75 said:


> 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.


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## Eric (Oct 20, 2009)

*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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## leslie (May 25, 2009)

To determine your expected exposure use the UBC currency plotter.
http://fx.sauder.ubc.ca/cgi/fxplot?...2&ly=2009&y=daily&q=volume&f=png&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.


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## CanadianCapitalist (Mar 31, 2009)

Eric said:


> 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'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.


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## leslie (May 25, 2009)

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.


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## Eric (Oct 20, 2009)

*It is more complex than I thought.*

Thanks for the clarifications. I don't understand these things well enough. I did not yet buy directly US ETF's. May be once the Canadian $ has passed parity, I will do the shift.

I am trying to get exposure to emerging currencies, because I do believe in the decline of the US dollar and that it will pull down the Canadian dollar with it - this is relative to other countries, that do not rely on export to the US to the same extent.


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## leslie (May 25, 2009)

OK you need to stop. There is a rule of investing that says "don't invest in what you don't understand". You admit you don't understand FX, so you should NOT make bets on it.

For example, you start with the presumption that the US will weaken.........well maybe, maybe not. Personally I think it may strengthen in the near term but that is because I also think the equity markets will retreat. Just an opinion, but do you really have an argument to disprove it?

Then, from that presumption you conclude that emerging currencies will rise in value. Yet above I gave you a link that shows you that many emerging currencies are pegged to the US dollar (Korea, HongKong, India) and will go the same way as the USdollar. 

Then, you think the Loonie will be linked to the USdollar vs (who?) only emerging countries, or emerging countries plus all the other major currencies? Can you give any argument why the trend of the last 6 years will change? Use the graphing link above. See for yourself what has been happening.


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## CanadianCapitalist (Mar 31, 2009)

leslie said:


> Then, from that presumption you conclude that emerging currencies will rise in value. Yet above I gave you a link that shows you that many emerging currencies are pegged to the US dollar (Korea, HongKong, India) and will go the same way as the USdollar.


I can't comment on Korea or Hong Kong but India has a partial convertability mechanism, which allows the exchange rate to fluctuate. 

http://finance.yahoo.com/echarts?s=...=on;ohlcvalues=0;logscale=on;source=undefined

The Rupee was pegged to the dollar in the 1990s.


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## yyzvoyageur (Apr 10, 2009)

The HKD is pegged to the USD with a lower limit of HKD 7.75 = 1 USD and an upper limit of HKD 7.85 = 1 USD.


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## leslie (May 25, 2009)

http://fx.sauder.ubc.ca/cgi/fxplot?...2&ly=2009&y=daily&q=volume&f=png&a=lin&m=0&x=
But this is missing the point.


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## mogul777 (Jun 2, 2009)

Well what's pegged and what isn't is all relative. The wheels are in motion to relax the pegs (to the USD). 

The curious comment is about the USD pulling the CAD down with it, in relation to it that is impossible so assuming other relations hardly relevant even without considering the above. And what's with all the pegged currency talk without mentioning the one that actually matters... the Yuan.


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## leslie (May 25, 2009)

But the point is that Erik should NOT be considering the currencies of emerging countries as a similar group that moves the same way vs the dollar or Loonie. Some are stronger and others WAY weaker. To have a position "want to go long emerging currencies" is .....


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## mogul777 (Jun 2, 2009)

leslie said:


> But the point is that Erik should NOT be considering the currencies of emerging countries as a similar group that moves the same way vs the dollar or Loonie. Some are stronger and others WAY weaker. To have a position "want to go long emerging currencies" is .....


Indeed. And since Eric has already said he doesn't understand it all makes sense. Perhaps this thread will educate him a little, perhaps all the chatter will just confuse things further. So look at the basic points and forget the arguing over which way some irrelevant currency will move. 

In case it's been lost Leslie's basic point is emerging currencies don't all move as one. I'll throw in another which is who cares, you shouldn't be basing your investments on the potential for future fluctuations in currency especially when you don't understand them. No harm in trying to learn though.


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## Eric (Oct 20, 2009)

Thanks for the multiple advices.

Yes I should thread carefully in areas I don't understand, and this is why I am happy I have found this forum. 85% of my investments are in the Canadian market in things I think I understand sufficiently, with 40% in fixed income - so I am not totally irresponsible - despite my questions. 

It seems to me that I ought to diversify a little out of Canada. For now, I have about 15% in Claymore International ETF's (CIE, CMW, CBQ), iShares XIN and Mackenzie Cundill Recovery.

I think 15% out of Canada is not high enough. Without getting into discussions about various speculations on the $US and $Can, for which I am not qualified; just in the name of diversification, I would have liked to have some exposure to other currencies. 

For instance, I believe the CBQ ETF would benefit if the Chinese Yuan is un-pegged - is this correct? I would like to have some exposure to this kind of events, just in case. And if the currencies remained pegged, there is no harm in investing a little in these countries anyway.


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## hylaride (Jun 11, 2009)

Eric said:


> For instance, I believe the CBQ ETF would benefit if the Chinese Yuan is un-pegged - is this correct? I would like to have some exposure to this kind of events, just in case. And if the currencies remained pegged, there is no harm in investing a little in these countries anyway.


In THEORY, a rapid rise in the chinese yuan would make your investments 'worth more' in canadian dollars, but the value of the company would revalue based on world supply/demand for its shares and the fundamentals of the chinese company would probably change. This is because the chinese economy would go through some turmoil if the yuan changed that much and make its exports more expensive.

The chinese are artificially keeping their currency cheap. Significantly cheap. Other countries that tried to artificially manipulate their currency got bit really hard (taiwan, thailand). It's one of the causes of the asian financial crisis of the 1990s. It scares me that a much bigger economy is now doing it on such a large scale.


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## mogul777 (Jun 2, 2009)

The Chinese and US currencies are dancing on a fine line. The powers that be know the magnitudes of the implications of not staying on that line. Letting the Yuan increase rapidly is not an option, increasing the speed of the increase however is desired... for the majority. This will happen, but China ultimately has control. But one does need to recall they also have an ungodly sum "invested" in USD that further complicates matters. Definitely not an area for amateurs to tread, but also well beyond what one needs to know to buy an ETF.

The escape of course is the path being taken of creating a new "basket of currencies" to use as the defacto global currency.


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## goertzen (Nov 18, 2009)

*Why I don't hedge*

My argument is that fund companies providing hedging probably expect to profit from it. This profit comes at *my* expense.

Therefore, I don't see how one can expect (in the statistical sense) a hedged fund to outperform the same non-hedged fund.


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## leslie (May 25, 2009)

Eric, you say you want exposure to foreign currencies 'in the name of diversification'. But your arguments rely on a position that the exchange with the Loonie will work in your favour. 

If you actually believe the diversification argument (I don't, nor have I seen any evidence to support it that I cannot demolish with common sense), then the reasons you give are irrelevant.

Look closely, are you really wanting to make a currency bet, but hiding behind the 'accepted' (but wrong) investing rationale? Know yourself.


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## Eric (Oct 20, 2009)

leslie said:


> Eric, you say you want exposure to foreign currencies 'in the name of diversification'. But your arguments rely on a position that the exchange with the Loonie will work in your favour.
> 
> If you actually believe the diversification argument (I don't, nor have I seen any evidence to support it that I cannot demolish with common sense), then the reasons you give are irrelevant.
> 
> Look closely, are you really wanting to make a currency bet, but hiding behind the 'accepted' (but wrong) investing rationale? Know yourself.


I think Buffet said something like 'diversification is a sign of ignorance'. I do not have insider information on anything I buy, and even insiders lack information. We are all ignorant to some extend; some more than others.

When I was much younger I was burned by too much concentration. I see diversification as an insurance. It has served me well over the years.

The question is how much and how wide the diversification should be. I would not diversify into something I know is poor. For instance, I am not buying any Canada Savings Bonds at 0.4%. So, you are right, I diversify into areas for which I have some positive inklings.

I am managing a substantial portfolio and over the years it has attracted several financial advisors. They gave me some good advices and some bad. One advisor, to whom I gave $300K to manage, was much worse than the rest of my portfolio. Although, I did learn a lot from advisors, I have the impression that my common sense is not that bad. I am still learning every day.

So, although I could not defend my inklings with a pro, I do trust them enough to guide me. For instance, during a recovery commodities are good places to be. This has served me extremely well. During the first 9 months of 2008, I sold some commodities and shifted a part of my stocks into bonds. May be it was just luck, but I am happy I did; I am sorry I did not do more.

Right now my inkling is that occidental countries have an unsustainable standard of living. Some emerging countries, with a much lower standard of living are moving up with phenomenal growth. My inkling is that I should put some money there. Buffet is doing it too, so it is not totally absurd. If their currencies remain pegged very low, I could just benefit from their exceptional growth. If external pressures get them to peg their currencies a bit higher, this could be profitable too.

It is risky, but I like to bet with may be 10% of my portfolio. The rest of my out of Canada component is in European blue chips and some in Australia. All of those are through the ETF's I had listed in my previous message.


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## Eric (Oct 20, 2009)

*Emerging markets*

Leslie, I re-read your post about your investments in :

"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." 

This is the type of investments I would like to understand better. They seem to have some correlations with CBQ.

Your un-hedged exposure to Brazil and your US-hedged exposure to India seem to be similar to CBQ - Right? I see that you are avoiding Russia (unlike CBQ) and this is something I would have wished to do.

You have a US-hedged exposure to HongKong. This is intriguing. I ought to know more about the economic differences between HongKong and China. Is this exposure similar to the CBQ exposure to China?

For now, I only have 3 to 4% exposure to emerging markets trough CBQ and some peaces of other international funds and ETF's. 

This thread and the likelihood of some market correction makes me wait a bit before I increase this exposure. I am not psychologically ready to buy US dollars now and gain access to their rich variety of ETF's while shorting the US dollar. I might do that in the future.

For now, I see the CBQ as a reasonable emerging market exposure, despite my dislike for its Russian component.


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## mogul777 (Jun 2, 2009)

Eric said:


> Leslie, I re-read your post about your investments in :
> 
> "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.
> ...


Have you actually looked at the details for CBQ? As of the last update 9/30/09 the Russian weighting in this so-called BRIC fund was not even 4% which is hardly anything to be concerned about. BTW the Russian market actually has the best fundamentals of the four.


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## Eric (Oct 20, 2009)

mogul777 said:


> Have you actually looked at the details for CBQ? As of the last update 9/30/09 the Russian weighting in this so-called BRIC fund was not even 4% which is hardly anything to be concerned about. BTW the Russian market actually has the best fundamentals of the four.


I did not know that. Thanks. I admit I have a bias against Russian investing because of their high level of corruption, although, of course, there is some corruption elsewhere too.


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