The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: moondoggle on January 15, 2014, 09:11:14 AM
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Hi guys, hopefully there's no 100 post rule here :) Long time listener, first time caller.
Was hoping someone could dumb this down for me. Super quick background:
I'm Canadian, this is regarding the funds I'm holding in my employer contribution RRSP plan. The holdings are in typical Couch Potato proportions. My question is about the US index portion of it; there is a US Equity Index fund, and a Hedged US Equity Index Fund. Could someone explain "hedging" to me as if I were five, and recommend one or the other? Thanks in advance mustachios.
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Hedging a US ETF to CAD means that it won't fluctuate based on *currency* movements, only on *stock* movements.
So if you have CAD$10000 of S&P500 HEDGED, the CAD gains against the USD by 20% but the S&P stays at (I don't know, 16000?), your investment doesn't move.
If you were NOT hedged, and the S&P stays at 16k, your $10k would become $12k in CAD. Obviously this works both ways!! If the US$ collapses you will lose that %age.
Hedging reduces currency exposure (good thing or bad thing? *Probably* a bad thing because you aren't capturing global 'truth'), but it does cost you money (ie, the MER/drag will be a little higher).
So if you want to track what the economy of a foreign country is doing, why *wouldn't* you also want to track the strength of its currency at the same time?
Try this link: http://canadiancouchpotato.com/2011/04/04/currency-hedging-in-international-funds/
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Thanks a lot Dave, appreciate it :)