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Dale Jackson

Personal Finance Columnist, Payback Time


If your long-term investment strategy requires more international presence in your portfolio, a window of opportunity is opening. After dipping below 70 cents against the U.S. dollar at the onset of the pandemic, the Canadian dollar is hovering near 80 cents after breaking through that level last month.

That means the loonie has more buying power outside of Canada where the U.S. greenback is the global standard. There is no solid consensus from currency experts on how long our dollar will hold at higher levels but higher crude oil prices are providing support. 

This could be the chance of a lifetime to set things right for Canadians with too much Canada in their portfolios. The term is “home bias” and we are notorious for overweighting our portfolios with publicly listed Canadian equities; two-thirds of which are resource or finance related and total less than three per cent of publicly traded global equities. 

That leaves more than 97 per cent of the world available to minimize overall portfolio risk and maximize opportunity by diversifying into other sectors and geographic regions.

Many international mutual funds and exchange-traded funds (ETFs) offer Canadian dollar denominated versions to hedge against currency risk, but hedging when the Canadian dollar is relatively strong can be costly in terms of fees and performance.

Currency hedged funds include extra fees for the hedging contracts sold on derivatives markets that smooth out currency fluctuations. The difference between hedged and unhedged versions of the same funds can be as high as half a per cent annually. That means the annual return on the underlying fund would be half a per cent less and a loss would be half a per cent more.      

In terms of performance, a Canadian dollar hedged fund will lose value if the loonie weakens regardless of how the holdings in the fund perform.

Over half of publicly traded global equities trade in U.S. dollars on U.S. exchanges, which means the best course of action when the Canadian dollar is strong is to trade unhedged in U.S. dollars. Retail investors might be surprised to learn that U.S. dollar trading is permitted in registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). Dividends from U.S. equities, however, are subject to a 15 per cent withholding tax.

Anyone who managed to make an RRSP contribution before the March 1 deadline but has not yet invested it might consider using the cash to beef up, or get the ball rolling on, a U.S. trading account. 

Creating a significant U.S. dollar trading account is not something you do overnight. Some investors could already have a large Canadian dollar cash reserve to convert, some Canadian dollar investments that have gained in value and could use some trimming, or some Canadian dollar flops that should be liquidated. Like any strategy, it’s something you do over time as long as the loonie holds steady or gains in value. If the Canadian dollar plunges for some reason, those U.S. dollars can be converted back to loonies for a profit and the cost of hedging could be worthwhile. 

While it may seem like speculating on currency fluctuations, having a significant stake in U.S. dollars is good for diversification and will come in handy if you plan to spend a good chunk of your retirement abroad once pandemic restrictions are lifted.

No matter where the loonie flies, lower fees and greater opportunity will be your reward.

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