Should You Invest in Currency-Hedged ETFs?

[@JustinBenderCPM]

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[@canpin]

Great info. Thanks!!!

[@frlife0]

best - video on the topic. no nonsense and factual with no agenda - keep it up 🙂

[@21Coins]

Thank you, I'm not from Canada but found the info very useful regardless. 50:50 was what I was leaning towards and you confirmed that is a sensible approach. Cheers

[@kawaiikittylee]

I’m new to personal finances and investing - this is the BEST video I’ve seen so far in regards to CAD Hedging / Un-Hedging. Thank you so much for making this and adding all of the additional charts and data. It is greatly appreciated! I subscribed 🥰 A follow up question: If you wanted to hold a CAD $ Un-Hedged ETF (e.g. VFV) vs a comparable USD $ ETF (e.g. VOO) in your TSFA for the long term - which would you recommend and why? For example, let’s say you already maxed out your RRSP, you plan to use Norbert's Gambit to convert the $, and taking into consideration that there are usually lower expense fees for USD ETF’s? Thank you!

[@JustinBenderCPM]

@Lee Ann Ng - We're so glad you enjoyed the video - thanks for subscribing! :) For TFSAs, I tend to just hold Canadian-based ETFs, as unlike in an RRSP, the US-based ETFs don't reduce the withholding tax drag on foreign dividends in a TFSA (although, as you mentioned, US-based ETFs tend to have lower expense ratios). As Norbert's gambit still has a cost, converting your CAD to USD and purchasing US-based ETFs in your TFSA can still offset the lower ETF expenses for several years. With my clients' TFSAs (and my personal TFSAs), I generally just hold a mix of Canadian-based Canadian, U.S., international and emerging markets equity ETFs. For the U.S. equity allocation, I'm currently favouring the Vanguard U.S. Total Market Index ETF (VUN), as it's more diversified than an S&P 500 index tracking ETF. For DIYers, an easier approach would just be to hold a 100% equity ETF, like VEQT. Good luck!

[@jmc8076]

@@JustinBenderCPM Late reply but thank you for this. Very helpful. Not sure if simple 2-3 fund portfolio is effective for a $1M plus portfolio in retirement but as we’re unwinding complicated holdings from a retiring advisor (who’s been helpful) for try at DIY I hope so. If PWL offered simple seminars (w/live QA sessions on investing for diff age groups or phases of life they’d prob be very popular just based on reputation for trust. We have read Dan’s book.

[@spencerkelly4491]

Amazing series on ETFs, really appreciate the level of detail!

[@JustinBenderCPM]

@Spencer Kelly - I'm glad you've been enjoying the videos - thanks for watching!

[@niranmojo]

Thanks to Justin and this video I choose the VFV etf instead of the hedged VSP etf.

[@rajaseth2577]

Is it not better to buy VSP since VSP is hedged? VFV and VSP have the same MER but VSP is hedged, right? Why did you end up buying VFV? Can u pl explain a little more? I am in the same situation now as i am looking to invest in either VFV or VSP, Quite a large amount

[@niranmojo]

@@rajaseth2577 Justin explains it best. What I would say is you don’t want to bet against the American dollar. Plus if you have 10,000$ invested, dividends kick in, compound interest does its magic. The with holding tax will hardly be noticed,

[@mattbonnell7023]

This video answered every single question I had. Great job. Thanks a lot.

[@JustinBenderCPM]

@Matt Bonnell - You're very welcome - thanks for watching :)

[@fredericbrown8871]

If EMH holds, I would be inclined to think the marginally higher historical return might be anecdotical for equity (was it statistically significant?) and that lower returns should be expected in the long term because of the higher fees. Moreover if the main reason for allocating to foreign equity is diversification and not edging reduces the volatility for hypothetically (slightly) higher returns, that's as close as you can get to a free lunch and I don't see any good reason to hedge foreign equity.

[@jugzster]

This is really helpful and well-researched, thanks. How about for bond ETFs, in general is it better to go hedged or unhedged?

[@JustinBenderCPM]

@juntoalrizal - As unhedged foreign bonds can be volatile (and arguably, the main reason to own bonds is for portfolio stability), it's generally advisable to go with 100% currency-hedged foreign bonds.

[@nursultantulyakbay7070]

This was really good, Justin. Thank you.

[@juniortj9428]

Thank you for posting again. What do you think of this portfolio holding allocation of VFV 40%, XIU 30%, XEF 10%, ZAG 20%

[@JustinBenderCPM]

@ Junior TJ - I like the composition of my model ETF portfolios better (cheaper and more diversified). What brought you to this allocation?

[@juniortj9428]

@@JustinBenderCPM I came to this allocation by watching your "understanding etf series" I researched each etf in your videos and I found the allocation of VFV, XIU, XEF and ZAG perform better and have a greater return than your allocation of 20% fixed income 80% equities. Or 40%/60%.

[@JustinBenderCPM]

@@juniortj9428 - Be careful not to base your investment decisions on past performance. Overweighting U.S. equities over the past decade would have resulted in higher performance (but a decade ago, no investor wanted to invest in U.S. equities, as they had performed so poorly over the previous decade). An investor could also invest 100% of their portfolio going forward into a U.S. equity ETF (like VFV), and have a higher past return than your portfolio or any of my model portfolios ... but you can't spend past returns.

[@juniortj9428]

@@JustinBenderCPM Thank you for your feedback. Do you think investing has become more complicated with a lot of ETFs on the market?

[@JustinBenderCPM]

@@juniortj9428 - I think too much product choice can certainly be a roadblock for most investors. But if they only consider the most broadly-diversified and low-cost ETFs available, there are only really around 20 individual ETFs that fit this description (most of these are included in the Canadian Portfolio Manager Model ETF Portfolios): www.canadianportfoliomanagerblog.com/model-etf-portfolios/ Or they could make their investing life even easier by opting for one of the Vanguard or iShares Asset Allocation ETFs.

[@harlemespanol]

Thank you for the informative video. You're the GOAT. 🐐

[@meemmjdn]

Thanks for the great informative video! You touched on Stocks and Bonds, and I was wondering what your thoughts are on hedged vs. non-hedged gold bullion etfs. I was indecisive between CGL and CGL.C, and finally decided to go with CGL (hedged). My thought process was that my investment in gold is meant as a bet against US dollar, so it would make more sense to invest in a hedged option. Now I'm understanding that going with a non-hedged ETF could have dampened my risks, but I think that would have defeated the purpose of an investment in gold which is betting on US dollar depreciation. I would be very interested to hear your thoughts on this!

[@JustinBenderCPM]

@meemmjdn: You're very welcome! Gold is a confusing asset class when it comes to currency-hedging. Even though it transacts in U.S. dollars, it doesn't really have much exposure to the U.S. dollar (so by purchasing a currency-hedged gold ETF, you are gaining a long gold position and a short U.S. dollar position): www.moneysense.ca/columns/claymores-cgl-when-buying-gold-isnt-enough/ www.trustablegold.com/hedging-gold-investments-against-currency-risks

[@henrywhh]

Thanks. Excellent presentation

[@ActiveGG]

I simply thought currency hedged ETFs are for low-risk taker and bought VSP past months but wow thank you! Now I learn. Not selling VSP yet but I will start buying VFV and slowly increasing non-hedged EFT percentage in my portforlio. Do you think it's ok choice for my TFSA?

[@JustinBenderCPM]

@ActiveGG - Glad I could help provide some clarity on currency-hedged ETFs :) TFSAs are a great place to hold most investments (like equities), as long as you don't need the cash for many years.

[@niranmojo]

A quick question for Justin, is ZNQ Better than ZQQ. The latter ZQQ(CDN hedged) has a higher dividend yield

[@dt5772]

Are the tax implications the same for hedged vs unhedged versions of US or international equity ETFs? (E.g. if held in a taxable account, are witholding taxes recoverable for both)?

[@chrissydieb5839]

Thank you very much - great video! As a Swiss investor, I wonder whether the conclusion is different if one is cares about the Swiss franc. 🤔 The Swiss franc as an anti-cyclic („a safe-haven“) currency behaves similar to the USD during a crisis thus USD-CHF hedging is not necessary. Nonetheless, CAD stocks would lose more during a crisis such that CAD-CHF hedging is useful. So overall, the situation is not very clear. In fact, the constant overvaluation of the swiss franc is horrible for investors (and the export industry).😱

[@JustinBenderCPM]

@Chrissy Dieb - I'm glad you liked it! Most of the historical data indicated that a Swiss investor was generally better off hedging away their foreign equity currency exposure (from a risk perspective).

[@chrissydieb5839]

Justin Bender Thank you very much for your feedback!

[@the_noble_lefty]

Great video. I was wondering... if an etf traded on the TSX holding US companies like VFV... I know it’s in Canadian dollars but who pays the currency conversion fees? Is it already factored in the price per share, is it in the MER, etc?

[@JustinBenderCPM]

@the_noble_lefty - The cost of FX conversion would be borne by the ETF investors (it would be factored into the net asset value per share over time), but Vanguard receives institutional rates, so it wouldn't be a significant cost.

[@the_noble_lefty]

@@JustinBenderCPM thank you

[@artemsklyar236]

Great insights and info! Thanks for sharing.

[@JustinBenderCPM]

@Artem Sklyar - You're very welcome - thanks for watching! :)

[@dorsia4167]

Excellent video Justin. Is there any difference between hedged and unhedged ETF in a TFSA account? Thank you.

[@JustinBenderCPM]

@A P - Yes, the account type the ETF is held in doesn't impact the currency-hedging strategy. If you buy a currency-hedged ETF in a TFSA, you are not exposed to the underlying foreign currencies.

[@dorsia4167]

@@JustinBenderCPM Thank you. I’m thinking to purchase the following ETF: XIU, XSP 50% - XUS 50%, VEE, VA. What do you think? Any suggestions? I’m new to the ETF.

[@JustinBenderCPM]

@@dorsia4167 - Check out my videos on one-ticket asset allocation ETFs. In my opinion, these are the best ETFs available to DIY investors (especially beginners :)

[@rajaseth2577]

Hi Justin, Is it not better to buy VSP since VSP is hedged? VFV and VSP have the same MER but VSP is hedged, right? what do you recommend? Can u pl explain a little more? I am in the same situation now as i am looking to invest in either VFV or VSP, Quite a large amount

[@JustinBenderCPM]

@Raja Seth - I've explained everything in the video - have you watched it yet?

[@tribukahu9335]

Do you think its better to switch from VFV to VUN? Thank you so much.

[@JustinBenderCPM]

@Tribu Kahu - ~80% of VUN is made up of the companies in VFV, so the two ETFs are expected to have similar performance over the long-term. However, VUN is slightly more diversified, so I usually opt for it over VFV in portfolios. If there are no tax implications for you of making a switch, you could certainly consider doing so.

[@tribukahu9335]

@Justin & Shannon Bender Thank you so much sir..

[@tribukahu9335]

@Justin & Shannon Bender I am planning to transfer my RRSP from RBC to Wealthsimple..Any advice on which ETF is best for at least 20 years? I already have Xeqt and VUN in my TFSA..Thank you so much..

[@random8624]

Thank you for this informative post! I remember reading your post a few years ago about the cost of hedging (futures contracts, etc) eroding the returns of hedged funds (in some cases, up to 1% lower return compared to the US counterpart). Does this still hold true? Thanks!

[@JustinBenderCPM]

@D - PWL's Director of Research, Raymond Kerzerho, wrote about the issues with U.S. currency-hedged products awhile back (here's a summary): www.theglobeandmail.com/featured-reports/article-are-canadians-wasting-billions-on-currency-hedged-etfs/

[@Mike_32]

Hi love the video just a question I own vfv for my long term retirement, the risk I’m concerned about is if the Cad dollar goes back pair with the US dollar when I retire that would be a -20-30% decrease in the US dollar ( give or take on worst case scenario) and that would be about a 40-50 % gain in the Canadian dollar. If I have 1 million in VFV would if go down 40-50 % because of cad Increase, making the 1 million dollars to 500-600K

[@JustinBenderCPM]

@Jordan Gaidola - If the USD immediately depreciated from 1.30 to 1.00 relative to the CAD (for a decrease of ~23%), your holding of VFV would decrease by ~23% (so your $1,000,000 would decrease to $770,000).

[@Mike_32]

@@JustinBenderCPM thank you for your respond I appreciate it , -23% decrease in US dollar , wouldn’t that be a 30 % increase in the cad making a 1 million investment turn to 700k -30% , does it affect the decrease of the USA dollar or the increase in the CAD dollar.

[@JustinBenderCPM]

@@Mike_32 - If you had $1,000,000 CAD, the the current FX rate was 1.30, then it would currently be worth $769,231 USD ($1,000,000 CAD / 1.30). If the US dollar depreciated to 1.00 CAD, your $769,231 USD would now be worth $769,231 CAD (for a loss in CAD of 23.08%).

[@Mike_32]

@@JustinBenderCPM thank you I appreciate it!

[@Waltznumber2]

At about 8:05, you say under Canadian retirees " For extremely conservative portfolios, currency-hedged ETF's could potentially reduce risk " . Yet soon after, you say that during severe market downturns like the financial crash of 2007-2009 and global pandemic of 2020, the hedged ETF's lost more in value than their un-hedged counterparts. What am I missing here ? For retirees, are hedged ETF's more or less risky than un-hedged ETF's ?

[@JustinBenderCPM]

@EngleHump - When I ran the back-tested analysis, I found that for investors with only 20% of their portfolio allocated to stocks (i.e., extremely conservative), hedging away the currency risk tended to reduce the standard deviation of the overall portfolio in most time periods. However, these currency-hedged conservative portfolios would have still lost slightly more during the financial crisis and the global pandemic than an unhedged portfolio.

[@Waltznumber2]

@@JustinBenderCPM Thanks for the clarification. Very useful information in your blogs. Cheers !

[@jenm1]

Do you think ETFs are generally overvalued?

[@JustinBenderCPM]

@Jen McConnell - ETFs do not become overvalued - it's the underlying asset classes the ETF holds that can become overvalued (but this is the same issue if you're buying mutual funds or individual securities). For example, some consider U.S. stocks to be overvalued (U.S. stocks are the overvalued "asset class" in this example). But you can buy the individual U.S. stocks directly, through a mutual fund, or through an ETF (it's not the security structure that is overvalued, it's the specific asset class).

[@jenm1]

@@JustinBenderCPM I understand - thank you for clarifying the misinformation out there. Maybe I just misunderstood some articles. Appreciate it nonetheless!

[@fasteddie328]

Can you speak in layman terms please.....

[@JustinBenderCPM]

@Fast Eddie - Is there a particular word or phrase that you're stuck on (or that a quick Google search can't shed some light on)?