Currency-Hedged ETFs: A Double-Edged Sword for Canadian Investors

The Canadian dollar has seen weakness in recent years due to various factors such as tariff threats from the US and strength in the US dollar. This can impact investors who own exchange-traded funds (ETFs) with substantial US exposure, causing fluctuations in their returns.

Currency-hedged ETFs are available for those who want to mitigate this risk, but whether they're worth it depends on individual circumstances. A case study of two nearly identical S&P 500 ETFs listed on the Toronto Stock Exchange shows that unhedged options can outperform hedged ones in certain periods.

However, looking at longer-term data, currency-hedged ETFs may actually experience higher volatility and deeper drawdowns due to the safe-haven behavior of the US dollar. This means that investors who rely on these funds for stability may be disappointed.

The problem with trying to predict currencies is that there are many variables involved, making it challenging to consistently forecast major currency movements. Instead of relying on forecasts, investors should focus on their investment horizon and goals, deciding whether hedging makes sense based on those factors.