The falling Canadian dollar CADUSD-FX is rightly seen as a gauge of international financial market concern about this country’s economic prospects.
But a weak currency is no impediment to successful investing, if you own U.S. stocks that are not hedged to the Canadian dollar. A falling loonie is your good friend in this situation.
A quick example from the world of exchange-traded funds: The iShares Core S&P 500 Index ETF XUS-T delivered a total return of a tick less than 36 per cent last year, while the iShares Core S&P 500 Index ETF CAD-Hedged XSP-T made 23.4 per cent. You own XSP if you want to make what the S&P 500 INX-I makes, with no distortions caused by the Canada-U.S. exchange rate. XUS is for investors who are willing to let currency fluctuations work for – or against – them.
If the Canadian dollar stabilizes and then retraces some of the ground it lost during its steep decline in the fall, then hedged investing will serve investors well. With our dollar rising against the U.S. buck, unhedged funds and stocks will underperform those that are hedged.
But there’s a lot weighing on the Canadian dollar now, including fundamental factors such as weak economic productivity and geopolitical issues such as U.S. president-elect Donald’s Trump’s tariff threats. Mr. Trump is a particular problem for the dollar because of his unpredictability. You can see this in his rent musings about using economic force to annex Canada.
U.S. stocks should be part of all portfolios with exposure to stocks – a default breakdown would be one-third Canada, one-third U.S. and one-third international for the equity side of a portfolio. But holding U.S. stocks doesn’t mean you have to invest in an ETF tracking the S&P 500, which has just come off a second straight year of huge returns. If you’re concerned about a market pullback, there are ETFs that hold low-volatility or “quality” stocks that may exhibit less downside vulnerability than the tech giants driving the S&P 500. Other options include ETFs tracking defensive sectors in the U.S. market like consumer staples.
It’s worth noting that the Canadian dollar’s worth is typically measured through its worth in U.S. dollars. Against all the currencies represented in the MSCI Europe Asia Far East index, our buck has held up pretty well. Returns from hedged and unhedged ETFs tracking this benchmark index for international investing were quite similar in the past year.
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