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Discussion Starter #1
Hi:

I've been reading up on hedging and was hoping someone here could help me double check something. There are many examples, but the e-Series funds will do to help illustrate.

There are 3 index funds that mirror the S&P 500 index:
TD US Index (TDB902)
TD US Index $US (TDB952)
TD US Index Currency Neutral (TDB904)

What my questions boil down to is this: Is it correct to state that TDB902 and TDB952 carry exactly the same currency risk? Would there be any other factors to consider? If they do carry the same risk, is there some advantage of holding one over the other?

To elaborate a bit, I understand that to buy TDB952 I first need to purchase USD and invest that directly. Naturally, I can expect the fund to move in tandem with the S&P500 (minus the MER). Easy peasy.

If I buy TDB902, no currency conversion is necessary, but the movement of the fund will reflect both the return of the S&P500 AND the price difference between CAD and USD.

As a result, if later I were to sell TDB952 and immediately convert the cash to CAD, I would end up with exactly the same amount had I simply purchased and sold TDB902. Is this right?

I should have mentioned that I fully expect to be spending the money in Canada and that in this hypothetical example, everything is within an RRSP (if that matters... does it?).

Cheers,
Pab
 

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You are generally correct, that TDB902 and TDB952 will behave the same.

Just remember that for regular retail investors, the cost of currency conversion is very high. It could be as high as 2.5%. So it doesn't make sense to convert from CAD to USD and then buy TDB952. TDB902 takes care of the currency conversion for you at no cost to you.

EDIT: I just checked my TDWH rates.

for CAD->USD, you get 1 USD = 1.027 CDN
for USD->CAD, you get 1 USD = 0.9973 CDN

So the round trip cost of coverting to USD and back is a little less than 3%. I have heard that other brokerages like Questrade have much better conversion rates. I'll consider switching in the near future.
 

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Discussion Starter #3
Thanks for the response slacker. I agree, with your point about the cost of currency conversion, but I'm quite happy that I wasn't too off the mark and so I think I get it overall. :)

Cheers,
Pab
 

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I have heard that other brokerages like Questrade have much better conversion rates.
Questrade charge 0.5% each way for registered accounts and 1.25% for open accounts. Plus they allow US$ in the RRSP so you don't have to keep converting.

Interactive Brokers has super-cheap conversion rates (practically nothing), but they only have open accounts.

[edit - IB also has very cheap commissions, however there is a $10/month minimum trading amount, so it might not be a good choice for couch potatoers]

Between those two brokerages, you can keep your exchange costs down quite a bit.
 

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also, if you are going to invest in us dollars, you can buy the same index SPY for an mer of .10% instead of .33% with td

if you intend to buy and hold, this might make sense
 

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Yes, I'm seriously considering switching from TDWH. My portfolio has MER of 0.25%, but my trading costs so far is actually 0.50%. this will cause a significant dent in my return.
 
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