arrow14 Comments
  1. [...] This post was mentioned on Twitter by Canadian Capitalist, Preet Banerjee. Preet Banerjee said: RT @CCapitalist: New Blog Post: Why currency-hedged funds have large tracking errors [...]

  2. David W
    Oct 27 - 12:31 am

    Very insightful! Can’t wait to read the full paper when I have time.

  3. Canadian Couch Potato
    Oct 27 - 1:26 pm

    Great post on an important and often misunderstood issue. Just downloaded the paper and look forward to reading it. Thanks, CC.

  4. Dr Dale Rathgeber
    Oct 27 - 2:19 pm

    Your bias is to own US equities unhedged. You are still young and currency flutuations might well even out over your life.

    However; how do you advise retired Canadian non-snowbirds concerned about the US printing money to “help” with their debt load (thereby de-valuing the US Dollar aganst the Canadian Dollar)?

    Should such persons buy US equity ETFs with a hedge feature, or just stay away from US equities altogether?

    • Canadian Capitalist
      Oct 27 - 2:46 pm

      @Dr. Dale: If I was retired, I would still own some equities. And a portion of those equities would be in foreign markets for the diversification benefits still available even with increased correlations between markets. As long as some portion of an investor’s portfolio is in foreign stocks, evidence suggests that those stocks should not be currency-hedged for three reasons: (1) Currency unhedged portfolios are not much more volatile than currency-hedged ones (and less volatile for US markets) and (2) Currency hedging appears to add about 1% extra cost and (3) Some currency unhedged positions reduce overall portfolio volatility.

      Also, I do not subscribe to the thesis that the US dollar is going to endlessly depreciate against the Canadian dollar. A very strong Canadian dollar will create significant economic headwinds. The Bank of Canada will not stand idly by if we are afflicted by the “dutch disease”. The Bank in past has made noises about intervening in currency markets if the dollar becomes too strong. I don’t think it is an empty threat.

  5. Dr Dale Rathgeber
    Oct 27 - 3:30 pm

    I hope that you are right about “dutch disease”.

    I am less sanguine.

    Good post though.


  6. [...] Canadian Capitalist points out why currency hedged funds have LARGE tracking errors and warns investors to keep a close eye on this disappearing [...]

  7. [...] Why currency-hedged funds have large tracking errors @ Canadian Capitalist [...]

  8. [...] can lead to destruction @ KNSfinancial -Where will your retirement income come from? @ DoNotWait -Why currency hedged funds have large tracking errors @ CanadianCapitalist -Low cost index trackers that will save you money @ Monevator -Is Google a [...]

  9. [...] It is often asked why currency-hedged funds have exhibited such horrendous tracking errors. It turns out that the bulk of the blame can be attributed to the tendency of stocks and currencies to move in opposite directions (See post Why Currency-Hedged Funds have Large Tracking Errors). [...]

  10. CanadianInvestor
    Mar 31 - 8:52 am

    Any theories why HXS is also exhibiting high tracking error per ? 1.2% vs the index when it is supposed to be a total return swap that automatically gives the index return gross of MER 0.15% and swap fees 0.30% with the index puzzles me and the rep I spoke to at Horizons could not give me an immediate answer. There is 1.2 – 0.45 = 0.75% unexplained tracking error. The research report on the Horizons website says the tracking error should only be 0.45%.

    • Canadian Capitalist
      Apr 01 - 11:00 am

      @CanadianInvestor: Interesting observation Jean. Like you say, the whole point of these Horizons ETFs is to avoid bad tracking errors. I do not have an idea as why HXT exhibits so much tracking error. I’ll try and find out from Horizons.

  11. [...] Vanguard S&P 500 Index ETF S&P 500. Finally, a Canadian ETF that tracks a traditional US stock index without currency hedging. It’s hard to believe this has been so long in coming. (Currently the only other unhedged US index ETF in Canada is the iShares US Fundamental, ticker CLU.C.) I’m surprised and a bit disappointed they didn’t create an unhedged version of the Vanguard MSCI U.S. Broad Market (VUS), which tracks a total-market index with more than 3,200 stocks. But this new ETF will at least allow Canadians to get easy access to large caps without having to trade in US dollars or deal with the persistent drag of currency hedging. [...]

  12. [...] readers know I don’t like currency hedging because of its relentless drag on long-term returns, so it’s good to know that Vanguard Canada is planning a non-hedged S&P 500 ETF later this [...]

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