Author Topic: Hedging USD for non residence  (Read 802 times)

Goanywhere

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Hedging USD for non residence
« on: November 05, 2021, 02:54:56 AM »
Hi there

For those that invest in USD index funds / ETFs but reside outside of the US, are you hedging the USD to your local currency?  I'd be keen to understand how you reached this conclusion. And likewise, if you are not hedged or somewhere in between.

At the moment I'm very unsure what the "right" answer is.

Thanks


FLBiker

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Re: Hedging USD for non residence
« Reply #1 on: November 05, 2021, 05:31:03 AM »
So I'm a US citizen and Canadian permanent resident, currently living in Canada and intending to remain here indefinitely (but you never know).  I'm not really hedging, and there are three main reasons for this.  First of all, based on what I've read (like this: https://canadiancouchpotato.com/2014/03/06/why-currency-hedging-doesnt-work-in-canada/) hedging between Canada and the US tends to be counterproductive -- when the US stock market swoons, the Canadian dollar falls.  Thus, historically, in this particular currency pair, it has been better not to hedge (and if I'm wrong about that, please let me know).  Second, I don't have an easy way to do it.  The vast majority of our investments are in USD tax-sheltered accounts that I can't invest in foreign currency in -- 403b, 457b, Roth IRA.  We also have a decent chunk in taxable, but I hate to incur the tax hit to sell the USD to buy CAD.  And finally, we're both currently still working (DW part-time, me full-time, but I'm planning to go part-time in the relatively near future) and earning in CAD.

Once we're fully retired, though, I'm planning to hold about 2 years worth of cash (mostly in CAD) so that we don't need to sell or exchange when things are terrible.  And once I hit 59.5, I'm thinking I'll convert some of my 403b to the Canadian equivalent (RRSP), to get more CAD exposure.

In other words, I'd be happy to have some more CAD exposure, but I'm not really sweating it because of the particulars of this currency relationship, and I'm not willing to incur an early withdrawal penalty or tax hit to get it.

ftsu21

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Re: Hedging USD for non residence
« Reply #2 on: November 06, 2021, 07:06:11 AM »
It depends on two things at least:
  • Which Asset Class You Are Investing In: In general, there is not too much need to hedge currency in equity products since the equity risk usually is much bigger than currency risk. However, if you invest in fixed income products such as bonds, then you likely need to consider currency hedging since the bond risk is often commensurable to its currency risk
  • Which Foreign Currency You Are Based in: If the foreign currency is pegged to USD then there is not much need for hedging. Otherwise, you might buy some hedging product based on say currency futures, and you need to make very different hedging decisions if you are talking about say JPY vs some other currencies due to their interest rates(search "Currency Carry" to find out)
There might be some other factors to consider, but I think these two are among the more important things.

The 585

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Re: Hedging USD for non residence
« Reply #3 on: November 06, 2021, 05:15:41 PM »
The vast majority of our investments are in USD tax-sheltered accounts that I can't invest in foreign currency in -- 403b, 457b, Roth IRA.

How is Canadian treatment of American investments, anyways? I think I heard they'll recognize Roth IRAs and they won't tax them, but what about 401ks? And no issue with double-taxation?

FLBiker

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Re: Hedging USD for non residence
« Reply #4 on: November 08, 2021, 07:56:12 AM »
The vast majority of our investments are in USD tax-sheltered accounts that I can't invest in foreign currency in -- 403b, 457b, Roth IRA.

How is Canadian treatment of American investments, anyways? I think I heard they'll recognize Roth IRAs and they won't tax them, but what about 401ks? And no issue with double-taxation?

It's pretty good, actually.  You have to file an election of your Roth IRA when you first file taxes here, and then Canada will recognize it as tax-free.  All the other ones (tIRA, 401k / 403b, 457b) are treated the same as they would be in the states -- growth is tax deferred, and it's taxed as income when you take it out.  And you don't get double taxed because you get credit on your US taxes for what you pay in Canada (and vice versa).  I haven't done any withdrawals yet, but I think the US takes the first 15% from those tax-deferred ones, and then Canada gives you credit for that 15% and taxes the rest (so they'd take 8% if you were in a 24% bracket in Canada). 

FrugalFukuoka

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Re: Hedging USD for non residence
« Reply #5 on: November 08, 2021, 11:21:06 PM »
My simple answer for index-investing is that any hedging strategy will probably cost more than it would save. If you keep investing periodically without worrying about the exchange rate you end up doing a dollar-cost average of your exchange rate as well, so as long as it's the same currency pair, over the course of a few years you end up getting the average rate.

However, you can be slightly proactive by keeping an eye on the rates. If you see a spike in the exchange rate in a for you negative direction, and you're just about to pour in a big amount, you might want to double check what is driving the spike, and perhaps postpone your investment by one month to see if the rate recovers. But that's entering market timing territory so tread lightly..