CAD-Hedged ETFs vs Non-Hedged USD ETFs
Investing in exchange-traded funds (ETFs) is a great way to diversify your investment portfolio and potentially earn returns on your investments. However, choosing the right ETF can be a daunting task, especially when there are different versions of the same ETF available. For example, you may have noticed that there are ETFs that are CAD-Hedged and ETFs that are in USD, and you may be wondering what the difference is and which one is right for you as a person investing in CAD.
First, let's define what CAD-Hedged means. When you invest in a CAD-Hedged ETF, the fund manager uses financial instruments such as futures contracts to offset the effects of changes in the exchange rate between the Canadian dollar (CAD) and the currency of the ETF, usually the US dollar (USD). This means that the ETF's returns are not affected by changes in the exchange rate between CAD and USD.
On the other hand, when you invest in a USD-denominated ETF, you are exposed to the exchange rate risk. This means that changes in the exchange rate between CAD and USD can impact the returns of the ETF, and it can work in your favor or against you. If the CAD appreciates against the USD, your returns on a USD-denominated ETF will be lower when converted back to CAD. However, if the CAD depreciates against the USD, your returns on a USD-denominated ETF will be higher when converted back to CAD.
Choosing between a CAD-Hedged ETF or a USD-denominated ETF depends on your investment goals and risk tolerance. If you are a long-term investor who wants to minimize the impact of currency fluctuations on your investment returns, then a CAD-Hedged ETF may be a better choice for you. This is especially true if you do not plan to shop outside of Canada or buy internationally.
On the other hand, if you are willing to take on some currency risk for the potential of higher returns, then a USD-denominated ETF may be a better fit for you. This is because you are essentially hedging your investments over USD and CAD. USD exposure can be a good or bad thing depending on how the exchange rate changes over time.
However, it's important to note that any hedging, whether it's FX risk or not, comes with additional costs. This means that a CAD-Hedged ETF may have slightly higher fees compared to a USD-denominated ETF. Additionally, if you're buying a USD ETF with CAD, your investment platform will charge you currency exchange fees. This can be avoided with a Norman's Gambit, but unless you're dealing with large investment purchases ($5,000+), it probably isn't worth the additional hassle and trade commissions.
For simplicity's sake, many investors opt for a CAD-Hedged ETF. This way, they don't have to worry about the additional costs and complexities of currency exchange fees or hedging. At the end of the day, the difference between a USD or CAD based ETF won't make a big difference compared to what the ETF is invested in and the fees involved. Ultimately, it's important to understand the trade-offs and decide for yourself based on your personal investment goals and risk tolerance.
