Canadian Money Forum banner

1 - 20 of 22 Posts

·
Registered
Joined
·
12 Posts
Discussion Starter #1
Hello Everyone,

I am relatively new to investing and recently bought couple of US stocks but I later realise that much of gains got balanced out by the CAD to USD conversion, is there a way around to this, how experienced investors tackle this issue? One way I can think of is to buy Canadian stocks but would like to tap into the US market too, other way is to buy Canadian funds that will have some US exposure. Could someone share their opinion.
 

·
Registered
Joined
·
851 Posts
One option would be to buy an ETF that hedges the currency. For example XSP provides exposure to the S&P500 that is hedged to CAD. A caveat is that there could be a cost to hedging and it is not perfect, which leads to some tracking error. Nonetheless, hedging would provide some protection from a rising CAD/USD.
20287

You could decide to hedge the exposure yourself by going long or short CAD future contracts on the CME.

Exchange rates are generally self-reverting in the long run, so if you are holding the positions for the long term, it would be best to just avoid exchange rate fluctuations as noise. They will be drowned by equity return fluctuations over the course of a few decades.
 

·
Registered
Joined
·
12 Posts
Discussion Starter #3
One option would be to buy an ETF that hedges the currency. For example XSP provides exposure to the S&P500 that is hedged to CAD. A caveat is that there could be a cost to hedging and it is not perfect, which leads to some tracking error. Nonetheless, hedging would provide some protection from a rising CAD/USD.
View attachment 20287
You could decide to hedge the exposure yourself by going long or short CAD future contracts on the CME.

Exchange rates are generally self-reverting in the long run, so if you are holding the positions for the long term, it would be best to just avoid exchange rate fluctuations as noise. They will be drowned by equity return fluctuations over the course of a few decades.
thank you for your response, I would probably avoid futures as I don't know much about them instead would buy ETFs or would not care about the fx rate.

Cheers,
DD
 

·
Registered
Joined
·
17,027 Posts
Hello Everyone,

I am relatively new to investing and recently bought couple of US stocks but I later realise that much of gains got balanced out by the CAD to USD conversion, is there a way around to this, how experienced investors tackle this issue? One way I can think of is to buy Canadian stocks but would like to tap into the US market too, other way is to buy Canadian funds that will have some US exposure. Could someone share their opinion.
Generally, I think the foreign currency exposure of foreign stocks is a desirable thing. It's part of the diversification you're getting by investing outside of Canada. The movement of the foreign index alone isn't really the issue... it's ultimately the movement of the foreign stocks on a CAD basis which matters.

For example in the first decade of this century, the US index went up, while the USD fell... the net result for Canadian investors was about nil gains. The USD decline wiped out the stock gains.

That's not as "bad" as it may seem on the surface. In the decade that followed it, the US index went up significantly more and the USD went up as well. The result was a ridiculously strong return for the Canadian investor.

Due to that kind of scenario, I don't hedge my foreign stock exposure. I just leave it as is ... and yes, sometimes currency effects will nullify your returns. It's OK because since we can't predict currency movements, there is no strong reason to believe that this will work "for" or "against" you.

If you were to go into XSP now, as many Canadians did in the first decade of this century, you might think it's a success in the short term. But those investors in XSP lost out tremendously once the currencies went the other way.

My suggestion is: don't hedge. Accept the foreign currency movements as part of the deal of foreign investment. It's a good thing for diversification. Remember that the Canadian dollar could, potentially, crash in some disaster scenario. If that happens, you can only benefit by holding foreign stocks unhedged. In fact it may save your skin.... investors in many countries have gone through this (Iceland, Argentina, etc)

In other words, the currency fluctuations go both ways. Sometimes it subtracts from returns, other times it adds to your returns.
 

·
Registered
Joined
·
851 Posts
thank you for your response, I would probably avoid futures as I don't know much about them instead would buy ETFs or would not care about the fx rate.

Cheers,
DD
Another consideration would be how much exposure to the CAD you have in other areas of your portfolio. If you have a good portion of Canadian stocks and bonds, then exchange rate fluctuations on your portfolio in its totality will be muted. Same goes if you own a house or business in Canada.
 

·
Registered
Joined
·
1,023 Posts
Generally, I think the foreign currency exposure of foreign stocks is a desirable thing. It's part of the diversification you're getting by investing outside of Canada. The movement of the foreign index alone isn't really the issue... it's ultimately the movement of the foreign stocks on a CAD basis which matters.

My suggestion is: don't hedge. Accept the foreign currency movements as part of the deal of foreign investment. It's a good thing for diversification. Remember that the Canadian dollar could, potentially, crash in some disaster scenario. If that happens, you can only benefit by holding foreign stocks unhedged. In fact it may save your skin.... investors in many countries have gone through this (Iceland, Argentina, etc)

In other words, the currency fluctuations go both ways. Sometimes it subtracts from returns, other times it adds to your returns.
There are arguments for and against. The problem w the CDN $ though is it is so highly tied to oil prices so you add oil price risk too in inadvertently. Recall in 2011 when oil was over $100/bbl and the exch was ~ $ 1US. Now oil is $39 and the $ is .73 US. No pt in adding ~ 27% volatility just for oil and currency moves IMO. The price of oil is just too unpredictable.

I like the $ hedged ETFs too.

Another option though is, if you travel a lot and need US$ frequently, is to set up a USD account at your brokerage.
 

·
Registered
Joined
·
17,027 Posts
The CAD does not actually correlate very strongly with oil any more. Just look at some charts and you'll see for yourself. As the energy sector has declined and become less relevant to the Canadian economy, the CAD's correlation has weakened as well.

Investing in Canada, or holding the CAD, is no longer an "oil play" as it once was.
 

·
Registered
Joined
·
1,023 Posts
The CAD does not actually correlate very strongly with oil any more. Just look at some charts and you'll see for yourself. As the energy sector has declined and become less relevant to the Canadian economy, the CAD's correlation has weakened as well.

Investing in Canada, or holding the CAD, is no longer an "oil play" as it once was.
They are still pretty correlated over the past 10 yrs. $ down 27% oil down 46%

Still pretty correlated.
20288
 

·
Registered
Joined
·
17,027 Posts
They are still pretty correlated over the past 10 yrs. $ down 73% oil down 46%

Still pretty correlated.
Those charts are correlated, but the reason they are correlated is because of USD behaviour, nothing to do with CAD.

What you're actually seeing there is the correlation between the US Dollar (generally) and commodities (oil). So this chart is a story of how the US dollar relates to commodities and oil.

Try plugging in $EURUSD to the same chart you made, and you'll see that EUR and oil are correlated too! Try $GBPUSD and it's an even stronger correlation with oil than CAD.

First chart below is the inverse US Dollar Index against oil, to show that it's really the USD itself which is the heart of that correlation. The next chart is GBP.

So the next time someone claims the CAD is correlated with oil, you could point out it's correlated just as strongly with EUR and GBP. By this logic, the Euro and British Pound are "petro currencies" too.

20289


20290
 

·
Registered
Joined
·
17,027 Posts
Clarifying: no question there is a correlation between CAD & oil, but I'm just saying that a large part of that ... perhaps most of it ... comes from the USD itself as you can see when you chart "-$USD" (inverse of US Dollar index).

Meaning that most of that correlation has nothing to do with CAD and the Canadian economy. For example, if the US Dollar weakens dramatically in the coming years, it will weaken against all currencies (including CAD) and commodities will rise as money shifts from dollars to commodities.

In that scenario, it will again look like CAD and oil are rising together, when in fact every major currency will correlate with oil & commodities.

This is one of those funny consequences of the USD being the world reserve currency.
 

·
Registered
Joined
·
3,625 Posts
I would buying some solid USD Stocks in registered accounts and not worry about the Forex.You could just buy index funds which gives you exposure to US stocks but in CAD ,I have holdings from 35 years ago so easy for me to say this but I would have told my 18 year old self to do this instead of wastin g the first 15 years in CAD only :)
 

·
Registered
Joined
·
1,023 Posts
Clarifying: no question there is a correlation between CAD & oil, but I'm just saying that a large part of that ... perhaps most of it ... comes from the USD itself as you can see when you chart "-$USD" (inverse of US Dollar index).

Meaning that most of that correlation has nothing to do with CAD and the Canadian economy. For example, if the US Dollar weakens dramatically in the coming years, it will weaken against all currencies (including CAD) and commodities will rise as money shifts from dollars to commodities.

In that scenario, it will again look like CAD and oil are rising together, when in fact every major currency will correlate with oil & commodities.

This is one of those funny consequences of the USD being the world reserve currency.
It is interesting. Oil is a bigger part of our economy than the US's though. Still when oil peaked in 2011, so did our $ vs the USD when they were at par so there is some independence of the 2 currencies. Since then our $ has tumbled 27% as oil fell 46%. It is pause for thought on hedging when you have these wild fluctuations regardless of which currency is more active.
 

·
Registered
Joined
·
17,027 Posts
It is interesting. Oil is a bigger part of our economy than the US's though. Still when oil peaked in 2011, so did our $ vs the USD when they were at par so there is some independence of the 2 currencies. Since then our $ has tumbled 27% as oil fell 46%. It is pause for thought on hedging when you have these wild fluctuations regardless of which currency is more active.
True, these are big fluctuations and there's no question they have a big impact on results. But I'm not confident that I can correctly predict the directions. I can't tell whether USD is going up or down from here ... so my outlook is neutral, which is why I invest in the S&P 500 unhedged (ZSP).

I also really want the foreign currency protection against a domestic currency catastrophe, and you can only get that by investing unhedged. Think about what investors in Iceland went through for example.

What a disaster it would have been, if an Icelandic investor had bought their equivalent of XSP. I think that 'currency hedging' your investments has this hidden danger.
 

·
Registered
Joined
·
1,023 Posts
True, these are big fluctuations and there's no question they have a big impact on results. But I'm not confident that I can correctly predict the directions. I can't tell whether USD is going up or down from here ... so my outlook is neutral, which is why I invest in the S&P 500 unhedged (ZSP).

I also really want the foreign currency protection against a domestic currency catastrophe, and you can only get that by investing unhedged. Think about what investors in Iceland went through for example.

What a disaster it would have been, if an Icelandic investor had bought their equivalent of XSP. I think that 'currency hedging' your investments has this hidden danger.
But if you currency hedged w XSP and the CDN $ tanks you are still protected.
 

·
Registered
Joined
·
17,027 Posts
But if you currency hedged w XSP and the CDN $ tanks you are still protected.
Maybe we're talking about different things but here's what I mean:

Say the S&P 500 moves 0% while the CAD falls 50% against other world currencies (devaluation or currency crisis). I think the responses of the different ETFs would be:

XSP: 0%
ZSP: 100%

Of these two, ZSP has protected the value you originally had by maintaining a steady value in terms of international currencies (since CAD has crashed, other currencies "soar" -- really staying put). XSP has left with you the highly devalued CAD, and you've missed out on all the foreign currency gains.

I would not call that XSP protecting me.
 

·
Registered
Joined
·
1,023 Posts
Maybe we're talking about different things but here's what I mean:

Say the S&P 500 moves 0% while the CAD falls 50% against other world currencies (devaluation or currency crisis). I think the responses of the different ETFs would be:

XSP: 0%
ZSP: 100%

Of these two, ZSP has protected the value you originally had by maintaining a steady value in terms of international currencies (since CAD has crashed, other currencies "soar" -- really staying put). XSP has left with you the highly devalued CAD, and you've missed out on all the foreign currency gains.

I would not call that XSP protecting me.
If you just deal in CDN though $ XSP has protected you against the 50% crash in the currency. If the situation is reversed you could lose 100% on ZSP. Now you get some idea of the risk and volatility you have added.

It's up to you If you want to speculate on currency go w ZSP. if you just want to speculate on the S&P go w XSP.
 

·
Registered
Joined
·
3,756 Posts
Open a US dollar account or transfer some of your account to one at your present brokerage. I did this 7 years ago and have made a tidy sum just on the rise of the US dollar. Plus the US stock market usually outperforms the Canadian market.
 

·
Registered
Joined
·
17,027 Posts
If you just deal in CDN though $ XSP has protected you against the 50% crash in the currency. If the situation is reversed you could lose 100% on ZSP. Now you get some idea of the risk and volatility you have added.

It's up to you If you want to speculate on currency go w ZSP. if you just want to speculate on the S&P go w XSP.
I see it very differently. ZSP is the "pure" foreign investment, because any foreign investment inherently involves FX exposure.

Again I would be concerned about a CAD implosion scenario. The only thing that will protect you are things like ZSP and XAW which are fully exposed to foreign currencies.

In comparison, if you held XSP and XIN, and if the CAD imploded, you would lose a tremendous amount of money in terms of purchasing power. You would be depriving yourself of the sharp increases that you should have seen in your foreign investments.

But ultimately... it's a gamble either way. If the USD crashes in the coming years, then ZSP will lose and XSP will win. On the other hand, if the CAD crashes, then ZSP will win and XSP will lose.
 

·
Registered
Joined
·
1,023 Posts
I see it very differently. ZSP is the "pure" foreign investment, because any foreign investment inherently involves FX exposure.

Again I would be concerned about a CAD implosion scenario. The only thing that will protect you are things like ZSP and XAW which are fully exposed to foreign currencies.

In comparison, if you held XSP and XIN, and if the CAD imploded, you would lose a tremendous amount of money in terms of purchasing power. You would be depriving yourself of the sharp increases that you should have seen in your foreign investments.

But ultimately... it's a gamble either way. If the USD crashes in the coming years, then ZSP will lose and XSP will win. On the other hand, if the CAD crashes, then ZSP will win and XSP will lose.
Maybe we both are right. Vanguard says for LT 20 yr decisions, currency has little effect on equity returns. For ST decisions, it can be a consideration as it adds more volatility and it is up to the investor's risk tolerances and preferences. They recommend hedging also for fixed income assets. Good article from Vanguard.

 
1 - 20 of 22 Posts
Top