Canadian investors with portfolios that include international holdings may not pay much attention to currency risk, particularly if such holdings make up a small percentage of one’s portfolio. Even for those with relatively low levels of foreign exposure, managing currency risk is important to do in an environment where high levels of volatility of the potential can impact currency markets as well as financial markets.
There are some in the financial community who believe the Canadian dollar will likely suffer over the long term and thus suggest unhedged foreign exposure. If you are in the camp of investors that believe foreign investment in Canada may suffer due to sector-specific risk related to energy, commodities and housing, then such a strategy may pay off long term.
In the near term, however, if you think that global monetary stimulus outside of Canada, primarily in the United States, will outpace Canada, then hedging one’s exposure via currency hedged ETFs may be a good choice.
My view has always been that having broadly diversified portfolio means including foreign holdings in said portfolio. Over the long term, predicting which way currencies will move is not a winning game. Investors who add geographical diversification to their portfolios are more likely to capture better risk-adjusted returns over long periods of time. For those with a shorter term investing time horizon, I’d recommend determining one’s risk tolerance first, then hedging accordingly.
Invest wisely, my friends.
