Harvest Portfolios Group

Why Some Investors Prefer Currency-hedged ETFs?

December 15, 2022

By Harvest ETFs

As a Canadian investor, if you hold an ETF with foreign equities in the portfolio, you may want protection from currency swings. For example, a rising CAD (falling USD) would lower the foreign stock returns in the portfolio. In this case, a currency hedging strategy can protect you from the effects of a decline in USD and other foreign currencies.

A quick currency refresher

As an investor, when you buy an ETF that holds foreign equities, you are taking on two types of risk. The first relates to owning stocks, as the price of the stock can go up or down.  The second type of risk is currency risk. This means you are exposed to the currency in which the stocks are denominated. If you hold US stocks and (1) the USD moves higher against the CAD, you get a lift in returns, (2) CAD moves higher against the USD, your returns decline.

Therefore, if you want to eliminate the second type of risk by removing the effect of fluctuating exchange rates, you may want to consider a currency hedged ETF.

At Harvest ETFs, we use currency forwards to hedge this type of risk. A currency forward is an instrument that lets the portfolio manager lock in a specific exchange rate on a future date. If the foreign currency has declined by the time that date comes due, the ETF will realize a gain on the value of the forward contract. The reverse is true if the foreign currency rises, the value of the contract goes down by the corresponding amount. The result, then, is that the impact of exchange rate gets netted out.

In short, during any period when the CAD rises in value relative to foreign currencies, a hedged ETF will result in higher returns in the foreign equity part of the investments. When the CAD loses value relative to foreign currencies, an unhedged ETF will usually do better.

The Harvest Enhanced Equity Income ETFs launched in 2022 do not themselves have a currency hedge. However, almost all the underlying ETFs they hold are currency hedged. The only exception is the Harvest Canadian Equity Enhanced Income Leaders ETF (HLFE) the underlying ETF of which holds only Canadian equities and therefore doesn’t need a currency hedge.  

  ETF   Hedged to CAD   Unhedged (B)   US Dollar (U)
  Harvest Healthcare Leaders Income ETF
        ✓         ✓         ✓
  Harvest Brand Leaders Plus Income ETF
        ✓         ✓         ✓
  Harvest Tech Achievers Growth & Income ETF
        ✓         ✓         ✓
  Harvest Equal Weight Global Utilities Income ETF
  Harvest Energy Leaders Plus Income ETF
        ✓         ✓
  Harvest US Bank Leaders Income ETF
        ✓         ✓
  Harvest Global REIT Leaders Income ETF


For informational purposes only. The information contained herein is not intended to provide financial, investment or tax advice. Investors should seek professional advice from qualified advisors when considering tax and investment decisions.

Commissions, management fees and expenses all may be associated with investing in Harvest Exchange Traded Funds (managed by Harvest Portfolios Group Inc.) The ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Please read the relevant prospectus before investing.

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