Need Help To Decide Between Hedged or Unhedged S&P500 ETF

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telemachus
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Need Help To Decide Between Hedged or Unhedged S&P500 ETF

Post by telemachus »

Hi folks,

I'm looking to add an S&P500 ETF to my portfolio. I've narrowed my search down to two Vanguard ETF's: VSP (Vanguard S&P 500 Index ETF CAD-hedged) and VFV (Vanguard S&P 500 Index ETF unhedged).

I looked at Vanguard's website and it shows that VFV has total net assets of $1.446 billion while VSP only has net assets of $0.571 billion ($571 million), so clearly retail investors favour VFV.

I looked at the performance over the past 5 years and VFV comes out ahead too because it is unhedged, so it benefitted from the drop in the Canadian dollar's value (relative to USD). Here is a chart of VFV, VSP, and the S&P500 index...

Image

As you can see, VSP (the hedged ETF) tracks very closely to the actual S&P500, but VFV has outperformed in the past 4 years because it benefitted from the Canadian dollar's drop against the USD which started around 2015. VFV would likely UNDERPERFORM if the Canadian dollar strengthens against the USD. Both etf's have the same MER.

I'm having a difficult time picking. Which one would you pick - hedged CAD or unhedged CAD and why? Thanks.


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Re: Need Help To Decide Between Hedged or Unhedged S&P500 ETF

Post by Insomniac »

The finiki explains it better that I can: http://www.finiki.org/wiki/Currency_hedging

VFV makes up over 20% of my portfolio.
telemachus
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Re: Need Help To Decide Between Hedged or Unhedged S&P500 ETF

Post by telemachus »

Thanks Insomniac. It seems like the more popular one too.
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Re: Need Help To Decide Between Hedged or Unhedged S&P500 ETF

Post by optionable68 »

Are you making currency bets? Buy VFV when you think CAD is overvalued.

Why not own both?

Disclosure: I own VFV and XSP
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ig17
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Re: Need Help To Decide Between Hedged or Unhedged S&P500 ETF

Post by ig17 »

OP, don't miss this reference in the Finiki article:

Why Currency Hedging Doesn’t Work in Canada

Most members here don't hedge for the reasons explained in Finiki.

You can own both hedged and unhedged as optionable68 suggested. Define valuations ranges for CAD, for example:

> 0.85: overvalued
0.75 - 0.85: fair value
< 0.75: undervalued

Buy unhedged when CAD is fairly valued or overvalued. Buy hedged when CAD is undervalued. This is easier said than done. You need to be very disciplined in following your own rules. Few people are that disciplined. I'm not sure if the extra complexity is justifiable. I doubt it adds a lot of value in the long run.
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Re: Need Help To Decide Between Hedged or Unhedged S&P500 ETF

Post by OptsyEagle »

Don't make your decision based on past performance. As you figured out, the only difference, in the two that you mentioned, is the moves in the currency. That statement leads to my next one. Never invest on your opinion on where a particular currency is going. You cannot ever know that, so if you want to make wild gambling bets, go to the casino or flip coins with your spouse over who gets the last chicken leg.

Buy the hedged or unhedged version of those funds based on how much currency risk you feel is prudent within your portfolio and risk tolerance. In my opinion, zero currency risk is too low and 100% exposure to foreign currencies is too much. I like my currency exposure around 30% but that is me.

In my opinion, those are the issues you should be considering when deciding between the two.
fireseeker
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Re: Need Help To Decide Between Hedged or Unhedged S&P500 ETF

Post by fireseeker »

A key consideration is time frame, which was not articulated in the OP.
If you're investing for a decade or more, there is little reason to pay for the hedge. Odds are the currency fluctuations will even out.
If you're investing for a shorter term, the hedge may be a reasonable expense to eliminate undesired currency risk.
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Re: Need Help To Decide Between Hedged or Unhedged S&P500 ETF

Post by Thegipper »

If I bought an ETF for USA currency exposure I would by the ETF on the USA exchange. I figure it costs less and has less tracking issues. I own stocks rather the ETFs. My exposure is 50/50 US/Canada My theory is simple. I spend close to 1/2 my time in the USA why not have 1/2 my investments in the USA. Besides I have so many more stock choices in the USA.
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Re: Need Help To Decide Between Hedged or Unhedged S&P500 ETF

Post by AltaRed »

fireseeker wrote: 12 Feb 2018 15:07 A key consideration is time frame, which was not articulated in the OP.
If you're investing for a decade or more, there is little reason to pay for the hedge. Odds are the currency fluctuations will even out.
If you're investing for a shorter term, the hedge may be a reasonable expense to eliminate undesired currency risk.
:thumbsup: A good perspective I think. I'd add that not only time for time's sake, but also age (which is also time related). Someone who is circa 80+ years old is likely no longer travelling ex-Canada for any length of time and is also more likely to be purchasing fewer and fewer consumer goods, both imported and domestic. Advanced seniors may not need as much inflation protection against the low loonie, nor do they have enough years left to recover from USD assets that have depreciated considerably from a high loonie. It seems to become more of a win-win to become more CAD (and hedged) oriented as one advances into their '80s.

I have never hedged my ex-Canada holdings for about 30+ years of investing. I've seen the highs and lows in the loonie and what goes around comes around.. and if it doesn't, such as the loonie being in the toilet for a long time, having USD exposure helps offset the consumer inflation that would occur as a result of the higher cost of virtually all of our imports.
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