Don’t bother with U.S. dollar units

With the loonie under continuing pressure and no obvious relief in sight, I’ve received several questions from investors asking whether they should be buying mutual fund units priced in U.S. dollars for currency diversification.

The short answer is No. Here’s why.

Most of the major fund companies offer U.S. dollar units for many of their American and international funds. That’s one of the reasons why the total number of mutual funds in Canada seems unrealistically high.

The U.S. dollar units are actually treated as separate funds in the computer analyses, as you’ll see if you check out the ratings on Globefund.

Same basic fund
Of course, they aren’t different funds at all. They are units in the same basic fund, only expressed in a different currency. Buying these units does not offer any currency advantage (or disadvantage) unless you are doing so to avoid paying an exchange rate.

Some mutual fund companies have issued advisories to brokers, financial planners and other sales people, making it clear that there is no advantage to buying U.S. dollar units with Canadian currency.

For example, Fidelity Investments issued communiqué last year that provided the following summary for financial advisors.

Convenience option only
“The U.S. dollar option is a convenience only. It does not give the investor any different economic exposure.

“If the Canadian dollar is weakening vs. the U.S. dollar, the investor does not get a better return by investing in the U.S. dollar option.

“The performance of a mutual fund is driven by its portfolio investments, regardless of which option is used.”

The advisory continues: “Although the weakness of the Canadian dollar may make U.S. dollar investing seem appealing, remember that U.S. dollars purchase the same number of fund units as would an equivalent amount of Canadian currency.”

Next page: Don’t make mistake

Don’t make mistake
So you start off with the same number of units in either case. The same situation applies when you sell. Your return will be determined entirely on the basis of how the underlying portfolio performs.

Fidelity goes on to say that the sole advantage of buying U.S. currency units is to avoid conversion charges. In other words, you should only use such units if you already have U.S. dollar assets. You should never pay to convert Canadian dollars to U.S. dollars to buy these units.

It appears that many investors have incurred unnecessary expense by converting Canadian dollars to buy U.S. currency units. Don’t make that mistake.

Adapted from the March 2002 edition of Mutual Funds Update.