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I want to buy units in an S&P500 index fund as part of my portfolios U.S. exposure. There are two versions of the same fund—one hedges against fluctuations in the CAD/USD exchange rate and the other does not. Both versions have the same MER.

In virtually every form of hedging Ive ever seen, the investor gives up some of his return in order to ameliorate some risk. So my question is this:does anyone know, on average, how much yield is sacrificed to provide currency hedging in an index fund of this type?

Although Id be a bit more comfortable knowing that I wont have to worry about the CAD/USD exchange rate, Im investing for the long term (over 10 years) so hopefully those effects would cancel out (notwithstanding some massive shift in the worlds financial landscape). I simply want to know how much this insurance would be costing me, to determine whether its worth it or not.

I want to buy units in an S&P500 index fund as part of my portfolios U.S. exposure. There are two versions of the same fund—one hedges against fluctuations in the CAD/USD exchange rate and the other does not. Both versions have the same MER.

In virtually every form of hedging Ive ever seen, the investor gives up some of his return in order to ameliorate some risk. So my question is this:does anyone know, on average, how much yield is sacrificed to provide currency hedging in an index fund of this type?Not much over the long run. Currency futures/forwards are fairly liquid. I would expect the costs to be around 25 basis points over the long run.

Are you indebted by any chance? Maybe you could achieve the similar hedging by merely converting a portion of your borrowings to US dollar denominated debt? With the recent rally in the USD (against the Yen and the CAD), this might not be a bad time to accomplish such.

Although Id be a bit more comfortable knowing that I wont have to worry about the CAD/USD exchange rate, Im investing for the long term (over 10 years) so hopefully those effects would cancel out (notwithstanding some massive shift in the worlds financial landscape). I simply want to know how much this insurance would be costing me, to determine whether its worth it or not.

Not a lot, but you have to also be careful about the tax treatment of futures if you are investing in a non-tax-sheltered environment.

I simply want to know how much this insurance would be costing me, to determine whether its worth it or not.

In general, the cost of hedging currencies is the difference between the interest rates on the two currencies. For the S&P500 hedged to CAD that you contemplate, with CAD interest rates higher than USD, you will pay that difference (and, if USD interest rates were higher, you would actually pocket that interest rate differential…)… In addition to that, you will incur the costs of trading the futures, etc. Since Barclays is doing this for you, this is a fairly modest cost, but a cost nonetheless. (By the way, that interest rate differential is a pretty good indicator of expectations for the future relative values of the two currencies.)

In any event, you do incur costs, and I am not persuaded that they are worth it over a full cycle… jmho…

By the way, that interest rate differential is a pretty good indicator of expectations for the future relative values of the two currencies.

Bill Bernstein had a differentopinionin 2000:

Lets first consider the 6-month Japanese bill with its puny yield. What the forward currency rate seems to be saying is Dont worry. In 6 months time the yen will appreciate by 3.37% (6.85% annualized), so youll make up for the lousy yield with currency appreciation. Theres only one problemit likely will not happen. It turns out thatforward rates are not predictive of future spot rates. Interestingly, some of this work was done by none other than Gene Fama. If this isnt an inefficiency, then Im Frank Lloyd Wright. Think about it. If the direction of the value of the yen in 6 months time is not predictable, then its expected value in 6 months is todays value. And if thats the case, then the unhedged bond has an expected return of 0.064%, and the naked currency hedge (that is, a hedge unaccompanied by a yen-denominated asset) has an expected return of 6.85% per year. The hedge return is not riskless, of coursethe yen is a notoriously volatile currency, and you could easily have your head handed to you. But clearly, owning the unhedged bond is a lousy idea, with a minuscule expected return and enormous currency risk.

So what does this mean to the global bond investor? Basically this; hedge those currencies with low yields and positive expected hedge returns, and do not hedge those currencies with high yields and negative expected hedge returns. Since at the present time the US has about the highest (except for the UK) interest rates in the developed world, this means completely hedging most global bond portfolios. Unfortunately for small investors, there are precious few hedged global or international bond portfolios that have reasonable expense ratios. The DFA 2-year and 5-year global portfolios have expenses of 0.29% and 0.41%, but require you to use a qualified financial advisor. The Standish International Fixed Income Fund has 0.53% expenses but high minimumseither $100,000 for direct accounts or $10,000 for supermarket purchases associated with a transaction fee.

With stocks things are even stickier. Since there is no relationship between stock returns and forward currency rates why not hedge your entire portfolio and collect the forward premium? Because there are no hedged indexed international stock funds. Period. So if you want a hedged international stock portfolio youll have to go with an actively managed international fund with its higher fees and trading costs.Basically, Dr. Bernstein recommends hedging when you can collect a hedging premium, i.e. for us, when Canadian rates are higher than the currency which is to be hedged.TopbenderSilver Ring

Basically, Dr. Bernstein recommends hedging when you can collect a hedging premium, i.e. for us, when Canadian rates are higher than the currency which is to be hedged.

Good post adrian2 – learned a lot from that one.

I own some mutual funds units in my portfolio and I would appreciate if someone could explain to me the difference between currency neutral mutual fund, currency-hedged mutual fund and currency-unhedged mutual fund.

Also do a local search… this topic has been beaten to death.Toptwa2wGold Ring

Assume a Canadian fund company with a US Equity fund reporting in Canadian $. The fund invests in the US and after MER has growth of 10% in US $ terms. Assume the US$ weakens against the Canadian $ by 15%.

A currency neutral fund is a fund which removes all changes in portfolio value that occur due to changes in currency flucutations. – both positive and negative changes. You will get a return that equates to the actual return of the fund in the currency of the market. Usually a cost in additional MER of about 10bps for this. This is usually done by hedging but there other methods.

Under the scenario above you would earn a 10% return

A currency hedged fund usually does the same thing but often the fund manager has the option to hedge as he sees fit so it may not be 100% currency neutral and if the manager thinks the currency is moving in the right way may not be hedged at all. This should be explained in detail in the fund prospectus.

Under the above scenario you could earn an return between 10% and

Of course an unhedged fund has no mandate to hedge currencies. You would get the return of the fund plus or minus any flucations inthe currency. In the above scenario you would be down -5%TopWishingWealthGold Ring

While I was reading thread(s) about XIN vs. non-hedged or currency neutral ETFs or funds, I was wondering if the companies are trying to be smart about it and milk/arbitrage while neutering the fund. IOW, iShares making a killing on those people who are currency change averse.

How do I optimize a search for a specific info on this forum, like e.g. currency-neutral or currency hedged mutual funds.

I am a newbie and your suggestions will be most helpful.

Also, how do I quote a part of someones post?

How do I optimize a search for a specific info on this forum, like e.g. currency-neutral or currency hedged mutual funds.Click on thesearchlink at the top of the page and follow the instructions. You may have to read through a number of threads before you find exactly what you are looking for.

Also, how do I quote a part of someones post?The forumsFAQis quite useful for stuff like that.Topig17Gold Ring

a currency neutral fund is not always the same as a hedged fund.

I sit corrected. I was thinking about index funds/ETFs and failed to consider active funds.

Thanks Jo Anne. I was under the impression that my search was supposed to lead me directly to the specific post or posts. I thought I was doing something wrong. Now thanks to you Jo Anne I know how it works. Thanks again.

I was under the impression that my search was supposed to lead me directly to the specific post or posts.

You can instruct the software to do just that:

Thanks to you and some other kind folks I am beginning to feel here like at home. You folks are very helpful.TopModeratorQModerator

How do I optimize a search for a specific info on this forum, like e.g. currency-neutral or currency hedged mutual funds.

I am a newbie and your suggestions will be most helpful.

Also, how do I quote a part of someones post?WADR, a bit of poking around would answer your questions. As pointed out there is a FAQ at the top of the page.

Administration & Sandbox carries the descriptionDiscussions and suggestions about the forum software. Try out the forum software here.. Check it out.

If you havent already, you should readFirst Time Posters: Read Before You PostTopuhohGold Ring

Frisky, you may wish to search over at the Canadian Business/ MoneySense website. Someone over there began a thread about this subject. IIRC, it was alsamba, lila or rabbitfan (you can search by the name of the person who posts). I forget which name she was using at the time. I am sure the posts are still there. I was searching for ETF information the other day and found something from over a year ago.

Here you go, this may give you another explanation: … 918140918

And here is the first post just to give you an idea of the discussion. It is close to what you are asking:

sorry for asking another question on this subforum. i hope some other folks will also benefit from the feedback.

also, i am hoping that by asking questions i am somewhat contributing to this forum (through seeking the answers that might be of use not only to myself, but also to some other forum members or readers).

its confusing to me what the difference is between currency-neutral funds , currency-hedged funds, and non-hedged funds.

please remember, i cant even dream to be as sophisticated as some leading members of this forum are. so excuse me for bringing up such a (dumb) question.

happy investing.As others have suggested, searching will bring up all sorts of answers for you. Even googling will turn up information on hedging. Also, dont forget that a great source of info is the companys website.[i]It could be that the purpose of my life is to serve as a warning for others[/i] ~ [i]anon[/i]TopfriskyBronze Ring

Id like to bring this back up please, as Im a little uncertain which e-fund I should be in. Currently I have a portion of my portfolio in the US Index in Canadian dollars. I have less than 10 grand in the account, and the plan for all of my e-funds is build them up to a larger sum then buy ETFs. So the time horizon for the e-funds isnt long by any means.

So can anyone please elaborate on the advantage (or lack of), of the TD US Index (currency neutral). I have no idea or care to speculate which way the USD is gonna go against our dollar.

Id like to bring this back up please, as Im a little uncertain which e-fund I should be in. Currently I have a portion of my portfolio in the US Index in Canadian dollars. I have less than 10 grand in the account, and the plan for all of my e-funds is build them up to a larger sum then buy ETFs. So the time horizon for the e-funds isnt long by any means.

So can anyone please elaborate on the advantage (or lack of), of the TD US Index (currency neutral). I have no idea or care to speculate which way the USD is gonna go against our dollar.

So can anyone please elaborate on the advantage (or lack of), of the TD US Index (currency neutral). I have no idea or care to speculate which way the USD is gonna go against our dollar.

I have recently taken the plunge; decided to manage my own finances. Have a couple of questions for the more experienced folk on this site who have been doing it for a while.

Going-in position is that I intend to live/retire in Cda (am 38 yr old). currently, over 50% of my investable NW (i am carving out a certain $ amt that I intend to use for a down pmt on a house/condo) is BMO stock (I was an employee). The rest is mostly cash. I am buying into the Bernstein/EMH-MPT/Asset Allocation paradigm, and am going with Idx Funds/ETFs.

That being the set-up, I think most would agree that I am way undiversified (though not if you read Rob Carrick recent article), and over-weight Canada (~4% of global equity mkt cap?)

(1) What if the C$ is on a long-term (20-yr) appreciation trend vs. the rest of the world? If I work towards a 10%-12% Cda allocation, wont this hurt me over the duration. If a counter-argument to this is that I cant know what the long-term trend will be, my counter-counter response would be: shouldnt I be trying to protect the downside, anyway? That is, I need to make sure that I will have enough at retirement, vs. getting the upside (Type I/Type II Error problem).

Would appreciate any thoughts/responses on this issue.

(2) If there are others of a similar mindset re: investing (lazy portfolio of ETFs and Index Funds) who also intend to live/retire in Canada, would appreciate any comps re: how yall have made your allocations – Canada/US/Eurozone/Japan/Emerging Markets – this for the equity portion. For the bond portion, I need to figure out the level of risk I am comfortable with first (per Intelligent Asset Allocator).

Going-in position is that I intend to live/retire in Cda (am 38 yr old). currently, over 50% of my investable NW (i am carving out a certain $ amt that I intend to use for a down pmt on a house/condo) is BMO stock (I was an employee). The rest is mostly cash. I am buying into the Bernstein/EMH-MPT/Asset Allocation paradigm, and am going with Idx Funds/ETFs.

Dont know how much stock you have overall, or what cost base its at, but you might consider liquidating it all to fund your house, and then re-borrow to invest in the portfolio. Doing so would allow your interest to be tax deductible.

That being the set-up, I think most would agree that I am way undiversified (though not if you read Rob Carrick recent article), and over-weight Canada (~4% of global equity mkt cap?)Some good advice would be to generally ignore the nonsense that is written in the financial media.

(1) What if the C$ is on a long-term (20-yr) appreciation trend vs. the rest of the world? If I work towards a 10%-12% Cda allocation, wontYour retirement expenses will be in Canadian dollars, Canadian stocks have the benefit of the dividend tax credit. Unless you have a very strong conviction against the the future of the Canadian economy, reducing your allocation to 12% wouldnt be a good idea at all.

(2) If there are others of a similar mindset re: investing (lazy portfolio of ETFs and Index Funds) who also intend to live/retire in Canada, would appreciate any comps re: how yall have made your allocations – Canada/US/Eurozone/Japan/Emerging Markets – this for the equity portion. For the bond portion, I need to figure out the level of risk I am comfortable with first (per Intelligent Asset Allocator).

55% Canada, 12.5% Pacific, 12.5% Europe, 15% USA, and 5% Emerging Markets, for an equity allocation is what I go with. Canadian companies themselves are also internationally diversified, with much of the profits being derived outside of Canada.

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