[crazydutchguy]

UPDATE - I searched a bit more in the forums and found more info on the differences between the various TD eSeries funds I'm looking at. Sorry for the duplication. However, if anyone has any further commentary on hedged funds vs non-hedged, I'm all ears.

Thanks!
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Hi CMF,

I had a quick look on the forums and didn't see a thread to answer my question, but please let me know if I've missed one.

I'm gearing up to start making regular contributions to my TDW discount brokerage portfolio in 2011 and I'm trying to understand the math related to my planned purchases.

**Note: I'm holding Canadian equity and Canadian fixed income in my TFSA and taxable account.

Current RRSP Portfolio Overview
Vanguard Total Stock Market (VTI)
Vanguard Europe Pacific (VEA)

Each month, I plan to purchase the following TD eSeries funds in my RRSP:

1) TD US Index (0.33 MER) (TDB902) OR TD US Index ($US) (0.33 MER) (TDB952) OR TD US Index Currency Neutral (0.48 MER) (TDB904)

AND

2) TD International Index (0.48 MER) (TDB911) OR TD International Index Currency Neutral (0.50 MER) (TDB905)


So my question is: What's the difference between purchasing and holding the different indexes above from a currency perspective?

Thanks very much for your comments and please let me know if there's anything else I may not have considered!

 

[avrex]

From one crazy dutch guy to another, welcome to the forum.

I always like to look at examples, when I'm trying to understand something like this. All these numbers are approximates and are for illustration only.

Here are the 1 year returns (as of Nov 30, 2010)
US$ TDB952 TD U.S. Index (MER 0.33) = +9.3%
Cdn$ TDB902 TD U.S. Index (MER 0.33) = +6.3%
Cdn$ neutral TDB904 TD U.S. Index Currency Neutral (MER 0.48) = +7.7%
Cdn$ vs US$ = approx 3.0%

Basically you are making a Cdn$ vs US$ selection.
- If you purchase US$ TDB892, you will get the approx. returns of the S&P 500 (minus the MER, of course). +9.3%
- If you purchase Cdn TDB902, you will get the returns of the S&P 500, but relative to the Cdn dollar. i.e. approx. 9.3%-3.0% = +6.3%
- If you purchase Cdn$ neutral TDB904, the fund is in Cdn$. However, the fund tries to replicate the US$ returns, by using financial instruments (i.e. hedge/derivative instruments). This Cdn$ neutral fund returned +7.7%, which is better than the Cdn$ +6.3% fund. However, it does not match the +9.3% achieved by the 'pure' US$ fund. The use of the financial instruments (and the slightly higher MER), can create a 'cost drag' and/or 'tracking error' on the returns that we are trying to replicate.

One would choose the TDB904 Currency Neutral if one wanted to hold this type of investment in Cdn$ plus was worried about losses from declines in the value of the US dollar against the Canadian dollar.

My opinion. Avoid the currency neutral TDB904, and select either US$ TDB952 or Cdn$ TDB902, based on the currency you want to hold this investment in.

 

[crazydutchguy]

Hey avrex,

Thanks very much for the reply and warm welcome!

I plan to hold the US and International indexes in my RSP. My account is with TD Waterhouse and they don't let you hold USD in your RSP. So given that I would also now face an expensive conversion rate on top of possible losses due to the currency valuations, I think it makes more sense to consider the US Index TDB902 ($CAD) over the US Index TDB952 ($USD).

What are your thoughts?

 

[avrex]

So given that I would also now face an expensive conversion rate on top of possible losses due to the currency valuations, I think it makes more sense to consider the US Index TDB902 ($CAD) over the US Index TDB952 ($USD).

Hi crazydutchguy,
My opinion is to hold the S&P 500 in $USD, the currency of the underlying index. However, the choice is yours. Some people make a decision, based on which direction they think the dollar is going.

If you are considering the US Index TDB952 ($USD) ....

So given that I would also now face an expensive conversion rate

don't let the currency converion rate deter you.

Read here about how to use the "gambit" to obtain US$ at the 'spot rate' and avoid the expensive 1.5% currency fee, in your TDW RRSP.

 

[Rysto]

What's the value in holding the USD mutual fund? Sure, you get the USD return, but when you sell it you're presumably going to get CAD for it. Won't holding the USD fund just add extra, unnecessary costs?

 

[CanadianCapitalist]

What's the value in holding the USD mutual fund? Sure, you get the USD return, but when you sell it you're presumably going to get CAD for it. Won't holding the USD fund just add extra, unnecessary costs?

The USD mutual fund makes sense only for those Canadians who have US dollar savings and want to invest in the US market. Canadians who have CAD dollar savings and want to invest in the US markets would prefer the CAD denominated index fund.

I agree with the comments in this section. I've found that year after year, the currency-hedged funds significantly underperform the USD denominated returns.

Here's XSP's underperformance over the past 5 years:
2006: -1.22%
2007: -2.26%
2008: -3.49%
2009: -3.34%
2010: -1.37%

Or how about TDB904's underperformance over the same time period?
2006: -1.18%
2007: -1.80%
2008: -1.59%
2009: -3.52%
2010: -1.65%

That's the kind of underperformance that will be deadly over a 20-year time frame. I'm convinced more than ever that investors have very good reason to avoid currency-hedged funds.