• Jorge Diaz

Currency Hedging of International ETFs (for Canadians)

Over the past 12 months, more precisely since the past "March 2020 stock market crash", there's been a slight divergence between the USD/CAD exchange rate. The variation, since, has been around ~13% "depreciation" of the USD rate against the CAD. I don’t have graphs from previous moments, but somehow there is a correlation between QE and this USD/CAD behaviour. Still, not the main point of this post.

USD/CAD Exchange Rate variation since March 2020.


My simple purpose with this article is to present the alternatives to hedging some of the most popular U.S. stock market ETFs to Canadian Dollars:


Hedging Foreign Stocks to Canadian Currency


Currency hedging, although not a vital investing topic, is a good concept that helps understand and "hedge" your investments against currency variations. I won't dig deep into it, but you can take a look at Justin Bender's Youtube video about it.


While currency fluctuations are as unexpected as the future is, having some hedging can be a good idea for Canadians who invest in international stocks.


U.S. Total Market & Nasdaq 100


Just to mention two of the most popular U.S. stock indexes Canadians invest in, the total U.S. market and the Nasdaq100 comes as a very good option to understand how hedging has been affecting returns over the past year.


Let's analyze the returns of both iShares XUU (unhedged) vs XUH (CAD-hedged):


On the period starting on March 22nd, 2020 and ending on March 20th, 2021, the returns for both ETFs have been as follows:

  • XUU - 52.34%

  • XUH - 69.44%

iShares Core S&P U.S. Total Market Index XUU vs XUH (CAD Hedged)


The divergence between both ETFs, that account for the same exact holding structure (as XUH is 100% XUU), is the result of the variation on the USD/CAD exchange rate.

In this scenario, having a 50% XUU + 50% XUH allocation would have resulted in a mid-point return between both graphs, estimated to be about 60.89%.


In the case of two Nasdaq100 ETFs that are also available for Canadian investors, the iShares XQQ (CAD hedged) vs Horizons HXQ, has been as follows:

  • XQQ - 85.31%

  • HXQ - 67.63%

NASDAQ 100 Index HXQ vs XQQ (CAD Hedged)


Also, in this scenario, a 50/50 allocation would have protected the "underperforming" part of the Nasdaq100 units from the exchange rate fluctuation.


Should I then Hedge My International Stocks?


The short answer is "partially". Just to follow the previous example, it is obvious that currency fluctuations will occur, but it is impossible to know in which direction. Hedging a portion or 50% of your international stocks is a good idea to be protected (in part) from these fluctuations.

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