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Hedging Currency

Hedging Currency


We are going on a quick trip to Las Vegas and when exchanging our Canadian dollars for US dollars it made me think how important currency exchange rates are when you invest internationally. The Canadian Dollar is 77.85 US as I write this. SUCKS !!

Should you be concerned about hedging your currencies if you live in Canada?

The change in value of a foreign currency relative to the Canadian dollar is an important factor to consider before investing in stocks that invest in non-Canadian assets. For example, if you invest in a stock in a US stock exchange that you bought in US dollars, the appreciation or depreciation of the US dollar against the Canadian dollar makes a big difference in your investment return. You have two options; hedged or unhedged.

How to Hedge Currency

While a currency hedge can be implemented in several different ways, the most popular are: Hedging with currency Swaps, hedging with forward contracts, and hedging with options. Here is a link if you would like more info on how hedging is preformed hedging currency. For the average investor that buys mutual funds, index funds, or ETFs this is very simple and a currency hedge is done for you when you buy a hedged product. Another option is a currency hedge through derivatives. Sounds complicated, but it’s actually pretty simple. All you need is a brokerage account that can trade currency futures.


It’s important for investors to consider their risk for currency exposure before investing in a stock or investments with a foreign currency. Some argue that over the long-term, currency fluctuations balance out, so there’s no need to hedge. Those who support currency hedging argue that most investors don’t hold an investment long enough for the effects of currency volatility. Dan Bortolotti from the Couch Potato Portfolio has an article couch potato portfolio. It is an older article from 2014, but it is still valid and argues the case for not hedging currency.

What We Have Done

We do both in our portfolio. See our investment structure here. We have approximately 50% hedged, although after reading Dan’s argument for not hedging I am reconsidering my decision as we tend to hold our core investments forever. For now we will stick with what we have. Check out the Word of the Week Hedging Currency.

Diversified portfolio


Diversified Portfolio

We have all heard how we should have a well diversified portfolio. A stock portfolio must be diversified so you don’t have just one stock, sector, or country. It’s not just stocks, you should be diversified with bonds, real estate, and alternative investments. There is lots of opinions about diversification, John Bogle founder of Vangaurd, suggested you should have your age in bonds versus stocks. An example, if you are 40 you should have 40% of your portfolio in bonds and 60% in stocks, if your 50 ,50% bond etc.

Over Diversified

But can you be over diversified?  When we owned mutual funds we had a few different Canadian equity funds as well as US, International and emerging market funds. I was diversified because I owned thousands of companies around the world. But when you overlap with more than one investment in a single country or sector you might be over diversifying, as most hold the same or similar companies. I found most of the Canadian equity mutual funds hold the same companies and sectors.


At the moment, in our TFSA we hold ZWC, ZWU, and ZWB. They are covered call Canadian ETF. ZWB is the Canadian banks, ZWC is Canadian dividend ETF, and ZWU is Canadian utilities. If you look in ZWC its top holdings are 36% banks, 21% energy,15% communication,10% utilities. ZWB holds 100% financial services and ZWU holds 46% utilities, 25% communication, 28% energy. That’s a lot of Canadian banks, energy, and communication. We are over diversified and might be better if we only owned ZWC. How did this happen?

Portfolio Creep

It’s called portfolio creep. Over the years you buy one sector that is doing good or supposed to be the next sector to do well, and next it is something else but you like what you already have so you keep it. That’s why you should look at your portfolio every so often and ask yourself if you are diversified and should change anything. Currently, we are not going to change anything in our portfolio, but when doing changes I will keep portfolio creep in mind. Feel free to check out our portfolio.