Q: Hi Peter,
One of the key goal of the current US monetary policies is trying to lower the value of US$. For the past decade, Canadian investors do not have to think of hedging. However, for the next decade, there is a good chance that exchange rate is going to move in the opposite direction. Over half of my portfolio is in the direct holding of US stocks, so it is unhedged. I do not want to sell my US holdings and buy CDRs, due to the tax consequence as well as not all US stocks have CDR equivalent. So for individual Canadian investor, how are we going to hedge the currency risk? Please explain the different approaches that we can employ to protect and hedge our portfolio. Thanks.
One of the key goal of the current US monetary policies is trying to lower the value of US$. For the past decade, Canadian investors do not have to think of hedging. However, for the next decade, there is a good chance that exchange rate is going to move in the opposite direction. Over half of my portfolio is in the direct holding of US stocks, so it is unhedged. I do not want to sell my US holdings and buy CDRs, due to the tax consequence as well as not all US stocks have CDR equivalent. So for individual Canadian investor, how are we going to hedge the currency risk? Please explain the different approaches that we can employ to protect and hedge our portfolio. Thanks.
5i Research Answer:
There are not a lot of great options for individuals, really. One could own FXC, which is a small ETF that tracks the C$ and will go up if the Canadian dollar does (it is up 4.71% this year). While not for everyone, and there is a cost to it, adding US debt to reduce total US$ exposure is also an option. Yes there are interest charges, but it would avoid selling and paying capital gains taxes. There are exchange traded currency options for dollar hedging purposes. These can be effective but again perhaps costly. Owning some gold and/or gold stocks might be the cheapest form of insurance against any US dollar decline. We think this is one major reason gold has done so well this year.