Q&A With Gordon Pape: Choosing Between a Hedged and Unhedged ETF

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Gordon Pape advises a reader in deciding between a hedged and unhedged ETF.

Q – I am going to contribute $6,000 to my TFSA at the start of 2021. I was planning to invest this in ETFs that have U.S. stocks but are traded on the TSX in Canadian dollars. Some of these funds have a hedged and unhedged version. If the forecasts are correct for a weaker U.S. dollar for next year, would I be better to buy the unhedged versions in these ETFs? Thanks very much. – Rob M.

A – When a fund is “hedged”, it means the managers have made arrangements to protect the assets against the effect of currency fluctuations. This removes one element of risk. An unhedged fund is fully exposed to currency fluctuations. In terms of Canadian-U.S. dollars, that means that a Canadian investor in an unhedged ETF that invests in U.S. securities would benefit from a rise in the value of the greenback. However, if the loonie goes up against the U.S. dollar, a Canadian investor will suffer a currency loss.

Predicting currency movements, especially short-term, is extremely difficult. That’s why I prefer hedged funds in this situation. Investing carries risk at any time, so why not remove one element of that risk? – G.P.

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