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Discussion Starter · #1 · (Edited)
Can someone recommend a CAD Hedged ETF for the SP500 that can support single trade volumes in the +800 shares range?
I've looked at ZUE & ZSP but they don't appear to have the volumes to move in/out quickly. Currently I'm trading VOO but taking big CAD vs USD hits each evening
 

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What do you mean big CAD vs USD hits each evening? Just because of the variability in the exchange rate? ZSP is not a hedged product, meaning it does not engineer out changes in forex. XSP does but now is the wrong time to hedge the Canadian dollar AFTER the horse has left the barn. The time to have done that is when the loonie was 71 cents. At 81 cents, most of the gain has already occured (and the loonie is now at its natural long term level (78-85 cents).

ETFs do not have the same liquidity issues as stocks because the 'market maker' normally intervenes to add ETF units to the market IF market price wanders too far up from NAV and takes ETF units off the market if market price drops too far below NAV. The market maker usually does that by placing both Bid and Ask volumes with an appropriate price spread, e.g. 2-5 cents, to help keep market prices from diverging too much from NAV. Some ETF providers do that better than others, and do it better on some of their ETF products than others. It is not consistent. I see that all the time on my real time Level 2 trading software.

Example at this very moment with VCNS: The market maker has >10000 units Bid at $28.26 and a similar amount Ask at $28.28. Volume so far this morning is 13215 units. The market maker is actively keeping market price between the ditches. A Bid or Ask volume of 800 shares of an S&P500 ETF is not going to move the market and will be easily filled. Certainly not ZSP which is the largest S&P500 fund domiciled in Canada.

Added: Another example: I hold the USD equivalent of ZSP with a ticker of ZSP.U. The market maker at this moment has >7000 units on each of the Bid/Ask sides with a spread of a few cents. Volume so far today is 122 units. I would have NO issue placing an order of 1000 units right in the middle of Bid/Ask spread.... Almost a guarantee it will get filled OR if I was to match the Bid or Ask price, it would get filled now. IOW, I don't care about volume traded. I care about how many units are on each side of Bid and Ask and the spread.

Edit: Some spelling/grammar issues. I need to proofread better......
 

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Discussion Starter · #3 ·
What do you mean big CAD vs USD hits each evening? Just because of the variability in the exchange rate? ZSP is not a hedged product, meaning it does not engineer out changes in forex. XSP does but now is the wrong time to hedge the Canadian dollar AFTER the horse has left the barn. The time to have done that is when the loonie was 71 cents. At 81 cents, most of the gain is already done (and the loonie is now at is natural long term level (78-85 cents).

ETFs do not have the same liquidity issues as stocks because the 'marker maker' normally intervenes to add ETF units to the market IF market price wanders too far up from NAV and takes ETF units off th market if market price drops too far below NAV. The market maker usually does that by placing both Bid and Ask volumes with an appropriate price spread, e.g. 2-5 cents, to help keep market prices from diverging too much from NAV. Some ETF providers do that better than others, and do it better on some of their ETF products than others. It is not consistent. I see that all the time on my real time Level 2 trading software.

Example at this very moment with VCNS: The market maker has >10000 units Bid at 28.26 and a similar amount Ask at 28.28. Volume so far this morning is 13215 units. The market maker is actively keeping market price between the ditches. A Bid or Ask volume of 800 shares of an S&P500 ETF is not going to move the market and will be easily filled. Certainly not ZSP which is the largest SP500 fund domiciled in Canada.

Added: Another example: I hold the USD equivalent of ZSP with a ticker of ZSP.U. The market maker at this moment has >7000 units on each of the Bid/Ask sides with a spread of a few cents. Volume so far today is 122 units. I would have NO issue placing an order of 1000 units right in the middle of Bid/Ask spread.... Almost a guarantee it will get filled OR if I was to match the Bid or Ask price, it would get filled now. IOW, I don't care about volume traded. I care about how many units are on each side of Bid and Ask and the spread.
Thanks for the reply AltaRed,
Would you mind if i PM you directly with a couple of questions/thoughts on what you've said above?
 

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Discussion Starter · #5 ·
As you wish.
Thanks AltaRed - i figure it's best to take your reply 1 paragraph at a time (as it is a lot to absorb)

What do you mean big CAD vs USD hits each evening? Just because of the variability in the exchange rate? ZSP is not a hedged product, meaning it does not engineer out changes in forex. XSP does but now is the wrong time to hedge the Canadian dollar AFTER the horse has left the barn. The time to have done that is when the loonie was 71 cents. At 81 cents, most of the gain is already done (and the loonie is now at is natural long term level (78-85 cents).

This all stemmed from a pattern I noticed each day in my accounts recently.
I have a Questrade portfolio showing me my CAD , USD and CAD(comb) & USD(comb) totals each day .
I confirmed with them that the CAD (comb) total is basically the USD x that day's bank of canada rate (converts to CAD) and added to my CAD balance to give that day's CAD (comb) total.

I'm trading VOO (USD) and using CAD to do this and when I sell and make my 0.05% or 1% gain (for instance) the account shows the profit I made in both CAD (comb) and USD(comb). Then the next day I look at my Cad(comb) total and see it has changed. I now understand the change is the result of the adjustment made over night for the new BOC exchange rate used to convert the USD to CAD etc. All this makes sense to me. I can see i still have the profit sitting in the USD account it's only the CAD(Combi) amount that is showing the "drop" from the previous day - again due to the exchange rate. (note this is becoming more prevalent as the CAD seems to be strengthening against the USD these last couple of weeks - and as i'm doing daily trades i can see the impact each day).

So this brings me to the idea of trading a CAD Hedged SP500 ETF instead of one that is in USD. The thinking being if i make CAD $1000 profit on a trade it will show up in my CAD (comb) total and not be effected by the changing BOC Rates each night. The problem with doing this though seems to be in the volume being traded. I'm making trades of +800 shares (VOO) and this liquidity at this volume is no problem for VOO as there is always a lot more shares moving back and forth at any given time. Any SP500 Hedged product i look at though seems to have a much lower volumes. I'm concerned i could get into trouble trying to buy/sell a volume that currently isn't supported by the EFT. Know what i mean?
 

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Firstly, you shouldn't be trading (buying and selling) VOO using CAD. Convert CAD to USD just once and trade in and out of VOO on the USD side of your account using USD. You are losing in forex commissions every time you convert between currencies.

Also, remember that it does not matter whether you hold VOO in USD or CAD equivalent. It has the same net value to you on a CAD basis whether you see it in your account on the USD side of your account or the CAD side.

By going to a hedged product, you zero out the impacts of changes in the value of the loonie and while that feels better (more stable), and that is what some people want, you are giving up the advantages of having some of your assets in USD as a 'hedge' against a loonie collapse. Example: In the 1920's, Germany's currency collapsed requiring a wheelbarrow full of German cash to buy a loaf of bread. Had the average German held some USD, that load of bread would have remained way more stable in USD. That is a dramatic example, but what if the loonie fell to 65 cents and stayed there for some time. Most of the consumer products you buy would cost 50% more in CAD, but no change in USD. Anyways, that is my argument about why one SHOULD not hedge and SHOULD be exposed to the exchange rate, especially to the USD. I wouldn't do that with Bolivian currency... I'd want to hedge against a collapse of Bolivian currency instead.

It is true the loonie strengthened throughout 2020 so you saw headwinds. The question is.... how much further will the loonie appreciate? You have to decide what is of most value to you, i.e. the value of the asset hedged back to the loonie, or the valuation fluctuations one will experience as the loonie bounces around. BTW, trading in/out of VOO is an ACB (adjusted cost base) nightmare. You must keep track of your acquisition and disposition prices in CAD equivalent so your spreadsheet will get really messy recording a currency conversion with each transaction.

There are legitimate concerns about liquidity (or lack thereof) of individual holdings, given you don't want to move the market, or price your Bid (or Ask) outside of the spread. It just is not as critical with an ETF as it would be with a stock. However, if you don't have access to real time quotes especially, i.e. only 15 minute delays, you are operating blindly. Further, if you don't have access to real time Level 2 quotes to see beyond the first Bid/Ask and what the market maker is doing, you are also operating a bit blindly, albeit using Limit orders alleviates most of that problem. XSP is an S&P500 hedged product and has tremendous volume. An order of 800 shares would be somewhat invisible in the overall market. Volume so far today 230,000 shares and there are 60,000 or more units on each side within a 3 cent spread.
 

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That is a dramatic example, but what if the loonie fell to 65 cents and stayed there for some time. Most of the consumer products you buy would cost 50% more in CAD, but no change in USD. Anyways, that is my argument about why one SHOULD not hedge and SHOULD be exposed to the exchange rate, especially to the USD
I completely agree and think that Canadian investors should use non-hedged ETFs for US investments.

There's another way to think about this issue as well. When you hold XSP, you're actually holding two things under the hood:
The S&P 500 stocks
and a short position on the US dollar

So while the currency hedged XSP feels "neutral" on currencies, it's actually bearish on the US Dollar. Here's a 5 year chart of the USD vs CAD.

I don't think it's a good idea to short something that's already this low. @AltaRed mentioned in his earlier post that the time to do this hedging would have been when the exchange rate was 71 cents = 1.40 on this chart. As you can see, that would have actually gone short the USD at its high.

But if you do this today, you are going short the USD near the bottom of this chart. Of course it could work out for you if the USD keeps declining.

21631
 

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It could fall to 1.15 or even 1.10 in the next year, or more unlikely to parity that a 10 year chart might show. Most economists and bankers feel the loonie's natural range is in the 80 cent range, give or take 2-3 cents. I'd call it neutral right now...with probably a bit more room to run due to strong commodity prices right now (oil, lumber, copper, etc).

I converted over $100k USD to CAD at circa 1.40 (71 cents) in late Mar 2020. The loonie will often have a swoon in the middle of an economic crisis.
 
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