Past paying brokerage commissions/spreads for forex conversions, you’re additionally getting fewer U.S. {dollars} for each Canadian greenback you change. Luckily, exchange-traded funds (ETFs) provide a number of methods to hedge towards this weakening Canadian greenback. Right here’s a take a look at some choices to think about.
Unhedged U.S. fairness ETFs
The primary choice, which you’re possible already uncovered to in your portfolio, is unhedged U.S. equity ETFs. Right here’s the way it works:
Vanguard S&P 500 Index ETF (VFV) is a well-liked one. It holds the USD-denominated Vanguard S&P 500 ETF (VOO) however doesn’t use derivatives to cancel out forex fluctuations between U.S. and Canadian currencies. Because of this, when the U.S. greenback strengthens, the worth of VFV rises past simply the actions of the S&P 500 index.
Why? As a result of VFV is denominated in Canadian {dollars}, whereas its underlying belongings are in American {dollars}. When the USD appreciates, these USD-denominated holdings are value extra in Canadian {dollars}. This forex impact is why VFV has outperformed its currency-hedged counterpart, the Vanguard S&P 500 Index ETF (CAD-hedged) (VSP), over the past decade.
Over a 10-year trailing time-frame, as of December 31, the U.S. greenback typically appreciated versus the Canadian greenback, boosting VFV’s whole NAV return to fifteen.15% in comparison with VSP’s 11.59%. So, for those who already personal VFV or one other unhedged U.S. fairness ETF, you’re inherently protected towards a weaker CAD and even stand to profit from a stronger USD.
Nonetheless, needless to say the reverse can also be true. If the CAD strengthens and the USD depreciates, VFV may lose further worth past the actions of the S&P 500 index. (Learn: “Is VFV a good buy?”)
International X US Greenback Forex ETF (DLR)
Should you’ve ever used Norbert’s Gambit at your brokerage to cheaply convert Canadian cash into American, you’re possible already accustomed to the International X US Greenback Forex ETF (DLR). If not, know that the method is fairly easy: you purchase DLR with Canadian cash, request your brokerage to “journal it over” to the USD-denominated DLR.U, after which promote DLR.U for U.S. {dollars}.
That stated, DLR isn’t restricted to forex conversion. It might probably additionally function a money administration instrument. By holding DLR, you’re successfully going lengthy on the U.S. greenback, whereas incomes the risk-free charge. Presently, it pays a 4.44% annualized distribution yield.
