Past paying brokerage commissions/spreads for foreign money conversions, you’re additionally getting fewer U.S. {dollars} for each Canadian greenback you trade. Luckily, exchange-traded funds (ETFs) provide a number of methods to hedge in opposition to this weakening Canadian greenback. Right here’s a take a look at some choices to think about.

Unhedged U.S. fairness ETFs

The primary choice, which you’re possible already uncovered to in your portfolio, is unhedged U.S. equity ETFs. Right here’s the way it works:

Vanguard S&P 500 Index ETF (VFV) is a well-liked one. It holds the USD-denominated Vanguard S&P 500 ETF (VOO) however doesn’t use derivatives to cancel out foreign money fluctuations between U.S. and Canadian currencies. Because of this, when the U.S. greenback strengthens, the worth of VFV rises past simply the actions of the S&P 500 index.

Why? As a result of VFV is denominated in Canadian {dollars}, whereas its underlying property are in American {dollars}. When the USD appreciates, these USD-denominated holdings are value extra in Canadian {dollars}. This foreign money impact is why VFV has outperformed its currency-hedged counterpart, the Vanguard S&P 500 Index ETF (CAD-hedged) (VSP), during the last decade. 

Over a 10-year trailing time-frame, as of December 31, the U.S. greenback typically appreciated versus the Canadian greenback, boosting VFV’s complete NAV return to fifteen.15% in comparison with VSP’s 11.59%. So, if you happen to already personal VFV or one other unhedged U.S. fairness ETF, you’re inherently protected in opposition to a weaker CAD and even stand to learn from a stronger USD.

Nonetheless, needless to say the reverse can be true. If the CAD strengthens and the USD depreciates, VFV might lose extra worth past the actions of the S&P 500 index. (Learn: “Is VFV a good buy?”)

World X US Greenback Forex ETF (DLR)

If you happen to’ve ever used Norbert’s Gambit at your brokerage to cheaply convert Canadian cash into American, you’re possible already aware of the World X US Greenback Forex ETF (DLR). If not, know that the method is fairly easy: you purchase DLR with Canadian cash, request your brokerage to “journal it over” to the USD-denominated DLR.U, after which promote DLR.U for U.S. {dollars}. 

That stated, DLR isn’t restricted to foreign money conversion. It could possibly additionally function a money administration instrument. By holding DLR, you’re successfully going lengthy on the U.S. greenback, whereas incomes the risk-free charge. At present, it pays a 4.44% annualized distribution yield.