Q&A: Hedging Your Bets With ETFs

When investing in ETFs that track U.S. indexes, should you use the hedged or unhedged version?

 

Q – I want to put money into an exchange-traded fund (ETF) that tracks U.S. stocks but I can’t decide whether to use the hedged or unhedged version. What do you suggest? – Ian M.

A – Many Canadian ETFs that follow U.S. indexes offer both hedged and unhedged options. The hedged funds eliminate currency risk and are usually a little more expensive as a result. The unhedged funds expose you to the vagaries of moving exchange rates. When the Canadian dollar is falling against the U.S. greenback, an unhedged fund will add to your profits. The reason is that the securities you are investing in (American stocks) are denominated in U.S. dollars. So if that currency increases in value against the loonie, you win. Conversely, if the Canadian dollar starts to rise against the greenback, you lose.

The safest route is to use the currency hedged fund, since it eliminates one element of risk. However, some economists predict the loonie could fall below US$0.85 and if that happens it would add some nice gains to the unhedged fund. In the end, you must decide how much risk you want to take. – G.P.

 

 

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