Currency Hedging

[FIRE47]

I am outside the US which will make this a little more challenging for people to answer for me.

I am in Canada and the latest wisdom is that as a Canadian I should be investing most of my international/US funds un-hedged as the $CAD reacts differently to most major developed currencies thus reducing volatility and giving me slightly better returns long-term so the theory goes. The $CAD reacts particularly different to the USD. As a balanced portfolio most Canadians should have 20-40% invested in the US markets (depending on bond allocations) and probably another 15-30% in international markets.

I have followed this wisdom but here is what is disturbing to me at this point - since only around 30% of my portfolio is in $CAD at this point (my CDN stocks and also my bond allocation) the currency gyrations are having more of an impact on my day to day and even weekly balance than the rest of the market is. My biggest holding is essentially foreign currency and on any given day a large rally can be erased by the CAD following risk assets upwards.

More of a rant then anything as it should balance out but what are everyone's thoughts and what do you do?

[dreadmoose]

I currently hold all of my investments (100% equities) in non-hedged funds (Namely: VFV, XEC, XEF, and HXT). From what I've read the currency hedge has slowed down gains when back-tested and I'm still in full accumulation mode.

I don't have a very reasonable explanation behind it but am assuming that you are following CanadianCouchPotato and their write up here:

https://canadiancouchpotato.com/2016/03/07/ask-the-spud-is-it-time-to-hedge-currency/

 I may look in to the Norbert Gambit once the VFV portions get high enough (along with changing to VUN or even the new VGRO fund and ignoring this) but am reserving any action for the next few years.

[RichMoose]

I have held currency-hedged positions in the past, and achieved positive results doing that. But I've also been on the wrong side of currency moves. I also don't follow a CCP type strategy, so I'm not buying a position with the intent (in theory anyways) of holding it forever.

Personally I don't think it makes sense for most Canadians to currency hedge their portfolios. This is because Canada imports most of its consumer products, commodities (our main export) are priced in USD, and you will always retain some CAD exposure with your job, your bond allocation, your government benefits, etc.

Most of the stuff out there against currency hedging is a bit outdated and is based on the cost issue. In reality, the costs of hedging have come down a lot, so tracking is actually very good and continuing to get better.

There is an argument that can be made for hedging a percentage of your portfolio, especially if you don't hold a lot of Canadian stocks or bonds. However, I don't think you fall into this camp since you are 30% in Canadian stuff as it is.

[DaveSch]

I would say, ignore the currency movements if you are investing for the long term.

If you are adding a little each month or quarter, the currency will be at invested at different levels over the years you are invested. Then when you are reaping your rewards, perhaps the movement back to you will be nearly as slow. This means that you will have an average somewhere in the middle.

Try not to look very often at the currency rates. If you get freaked out when the direction is badly against you, and yank your money back, then you will lose. Otherwise you will be a big winner.

You can probably find hedged products, but they will probably cost you more than if you just went with the flow.

Dave

[gerardc]

One way to think about it is to imagine you can live anywhere in the world once FIREd. So it doesn't necessarily matter if Canada tanks or your investments measured in CA$ decrease or increase, you can still afford the same standard of living elsewhere. In other words, in a day with US market gains but overall CA$ losses due to the CA$ increasing value, just remember that you may have less CA$ but it's worth more elsewhere in the world. The only reason your unhedged funds will lose value due to currency movement is if the CA$ becomes stronger, i.e. you didn't ride the wave in your country, but that's not necessarily a bad thing.

[Andy R]

I think there is a huge difference depending on if you were in accumulation or drawdown.
If in accumulation, the volatility is actually good as you can get the rebalancing bonus that includes the currency movements.
If in retirement, you can have a multi-decade upside of the currency which is what happened in Australia 2000-2018 (Australia is very similar to Canada in the currency and industries).
The AUD doubled vs the USD from 2000 to 2011, and until now is still 1.5x
So if you had an all world caps unhedged portfolio, you would be spending down twice as fast for the last 2 decades, and you can imagine the impact.

Vanguard in Austalia offers a one-stop ETF which is about
40% Australian equities
30% Developed large caps unhedged
18% Developed large caps hedged
7% Developed small caps
5% EM

This was where previously they had Australian equities at 50% and they had no hedged.
This new allocation was to reduce the concentration risk in the market that is only 2% of the worlds markets, and also compromise on the hedging cost by hedging only about 30% of the developed large caps fund.

I am not sure if 40% local market is too much (probably is), but the point is the step towards reducing concentration risk from home bias introduced currency risk which they offset with part currency hedging.
To me it looks like a good compromise between diversification and currency hedging.