Q: Today I asked the following question
"I am looking at hedged ETF's and specifically VSP. I was interested to see how well the ETF tracked the index and found that over a 5 year time frame - it underperformed by about 11%. (Total return for VSP is 81.0% and SPX is 93.33% - The Vanguard US ETF - VOO tracks SPX almost exactly.) I am assuming that this underperformance is because the hedging strategy is not perfect?? .......or does the 11% difference represent the cost of hedging?? Also - would other hedged ETF's have similar comparisons?? Thanks"
The answer
"The performance difference is not that the hedge doesn't work, it is because it does. VSP takes away the currency impact. The Canadian dollar has been quite weak over the time period noted, so VSP has not benefitted from the rise of the US$ vs the C$. "
This answer makes no sense.
If VSP takes away the currency impact - the returns should match the S&P 500 Index ....that is the whole point of hedging - but its 11% off - that is the question. It is either because the hedging strategy is not effective or its due to the cost of the hedge.
The unhedged equivalent Vanguard Canada ETF VFV outperforms the S&P 500 index as you would expect due to the weaking CAD........because it is unhedged....which makes sense.
"I am looking at hedged ETF's and specifically VSP. I was interested to see how well the ETF tracked the index and found that over a 5 year time frame - it underperformed by about 11%. (Total return for VSP is 81.0% and SPX is 93.33% - The Vanguard US ETF - VOO tracks SPX almost exactly.) I am assuming that this underperformance is because the hedging strategy is not perfect?? .......or does the 11% difference represent the cost of hedging?? Also - would other hedged ETF's have similar comparisons?? Thanks"
The answer
"The performance difference is not that the hedge doesn't work, it is because it does. VSP takes away the currency impact. The Canadian dollar has been quite weak over the time period noted, so VSP has not benefitted from the rise of the US$ vs the C$. "
This answer makes no sense.
If VSP takes away the currency impact - the returns should match the S&P 500 Index ....that is the whole point of hedging - but its 11% off - that is the question. It is either because the hedging strategy is not effective or its due to the cost of the hedge.
The unhedged equivalent Vanguard Canada ETF VFV outperforms the S&P 500 index as you would expect due to the weaking CAD........because it is unhedged....which makes sense.
