Capitalizing on Currency Movements

For investors looking for smart moves in today's fluctuating market, holding U.S. equity ETFs and mutual funds with currency hedging is becoming increasingly attractive. As the U.S. dollar weakens against the Canadian dollar, these hedged funds are starting to shine.

The Rise of Hedged Funds

Despite skepticism surrounding currency hedging due to past performance, recent data shows these ETFs are proving their worth. According to National Bank Financial, they not only reduce return volatility but also remain resilient during significant currency shifts.

What is Currency Hedging?

Currency hedging utilizes financial instruments to buffer against currency fluctuations, allowing investors to focus on the actual performance of the underlying stocks. Interestingly, the cost of owning hedged and unhedged funds is nearly identical, yet their performance can vastly differ.

Performance Breakdown

For instance, the hedged S&P 500 delivered an impressive average annual return of 10.9% over three years leading up to April 30, while the unhedged version saw an even better 14.6%. This shows that in a falling dollar environment, particularly with U.S. equity funds, hedging can make a significant difference.

Current Trends: Dollar Decline and Its Impact

The dynamics have shifted, especially as the global trade war ignites uncertainty around the U.S. dollar. Following the Canadian federal election results, the loonie strengthened, trading around 71.25 U.S. cents, a marked increase from earlier in the year when it dipped below 69 cents.

The Numbers Don't Lie

Evaluating recent S&P 500 returns gives clear insights into the hedged versus unhedged scenario: through May 8, the hedged index fell by about 3.9%, while the unhedged counterpart declined by 6.6%. This illustrates how the Canadian dollar's recent resurgence greatly benefits those investing in hedged U.S. equities.

Looking Ahead: The Case for Hedging

With the Canadian dollar recovering from lows, the potential for continued strength remains. As long as uncertainty swirls around U.S. economic policies, the Canadian dollar may have the momentum to rise further. For savvy investors, now might be the perfect time to consider hedged U.S. equity funds as a strategic play.