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.