Comments on: Revisiting the Tracking Error For Currency-Hedged Funds

By: Ryan

Ryan — Tue, 19 May 2009 22:50:17 +0000

So it would be a better idea to convert my Canadian funds to US funds and purchase IVV vs XSP? I noticed using google finance and comparing the period Jan.4 2002 – May.19 2009, IVV lost -21.30% while XSP lost -42.10%? How’s this possible??

By: A Lap Of The Blogs : WhereDoesAllMyMoneyGo.com

A Lap Of The Blogs : WhereDoesAllMyMoneyGo.com — Fri, 16 Jan 2009 01:16:39 +0000

[...] Canadian Capitalist has a fantastic post which looks at the true costs of currency hedging. [...]

By: » Revisiting the Tracking Error For Currency-Hedged Funds » Forex Currency Trading

Thu, 15 Jan 2009 22:00:56 +0000

[...] news by unknown « Forex On The Top: What is a Forex Broker? Elliott Wave Count On The GBP/USD Currency [...]

By: Silicon Prairie

Silicon Prairie — Tue, 13 Jan 2009 18:06:33 +0000

You aren’t exposed to more exchange rate risk by making foreign investments in a third currency, but you may be exposed to more currency conversion fees when buying and selling. I wonder how the MER on something like the TD e-Series EAFE fund compares to a US ETF when this is taken into account…

By: DM

DM — Tue, 13 Jan 2009 14:17:47 +0000

@Jordan,
Thanks very much, I’ll take a look.

By: Jordan

Jordan — Tue, 13 Jan 2009 03:48:55 +0000

@DM

I know you didn’t ask me, but I had the same sort of question and found a really great article that answered it for me on the Canadian Financial DIY blog.

http://canadianfinancialdiy.blogspot.com/2007/05/clarification-of-foreign-exchange-risk.html

It shows that when you own an international investment based in USD you are actually still exposed to the underlying currency.

By: DM

DM — Tue, 13 Jan 2009 03:22:36 +0000

@CC, thanks very much for this discussion, I’ve found it very useful. I’m still new to DIY investing so I’m not sure about this, but looking beyond USD, are there ETFs denominated in Euros that I could invest in directly in order to get European equity exposure? I see the underlying ETF to IShares Canada’s currency neutral MSCI EAFE offering is EFA, which trades in USD. Is USD the currency of choice for most pan-European or international equity ETFs? Even if I could find an appropriate Euro denominated product, would it be too much to expose myself to both USD and Euro currency risk? Thanks very much for anyone’s comments.

By: Dividend Growth Investor

Dividend Growth Investor — Mon, 12 Jan 2009 17:07:45 +0000

One could open a currency account ( taxable however) with most forex brokers and put only 1% down. Hedging however does tie out some of your capital which could be used to invest in other asset producing ventures. Most brokers would pay you a money market yield on your funds that you hav put as a collateral in the fx account.

By: Canadian Capitalist

Canadian Capitalist — Mon, 12 Jan 2009 17:06:22 +0000

EconStudent: I corrected the headline. I agree that using “hedged” Funds is very confusing.

SP: Like much of the fund industry, these funds serve the demand due to performance chasing. When these funds were first introduced, the rapid appreciation of the loonie was topmost in investor’s mind and they believed that the small extra MER was the only cost of these funds.

Larry: Thanks for the mention and checking with iShares.

Mike: I guess the costs of hedging are so large that it may be better for investors to take their chances with direct holdings in foreign stocks.

Jordan: That’s another interesting data point. A 2.5% performance drag is a lot, especially considering that currency conversion charges will be amortized over a long time.

By: Jordan

Jordan — Mon, 12 Jan 2009 12:51:31 +0000

If it helps I’ve just calculated the total 2008 returns of the RAFI FTSE US Fundamental Index being hedged or in USD.

Claymore’s Index (CLU) is in CAD with a 0.65% MER
PowerShares’s Index (PRE) is in USD with a 0.39% MER

CLU returned -41.7%
PRF returned -40.2% or -26.8% in CAD

For the test I didn’t use the actual index or tracking error rate provided on their sites, but created a globefund.com portfolio which adds in the distributions.

I even used a 1% retail currency conversion fee to buy PRF, so this shows that hedging, a higher MER and maybe other fund differences had about a 2.5% drag/difference.

Cheers