Why Some Investors Prefer Currency-hedged ETFs?

August 24, 2020

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, 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 do better.

Harvest offers these ETFs in the following currency units:

ETF Hedged to CAD Unhedged (B) US Dollar (U)

Harvest Healthcare Leaders Income ETF

TSX: HHL, HHL.B, HHL.U

        ✓         ✓         ✓

Harvest Brand Leaders Plus Income ETF

TSX: HBF, HBF.B, HBF.U

        ✓         ✓         ✓

Harvest Tech Achievers Growth & Income ETF

TSX: HTA, HTA.B, HTA.U

        ✓         ✓         ✓

Harvest Energy Leaders Plus Income ETF

TSX: HPF, HPF.U

        ✓         ✓

Harvest US Equity Plus Income ETF

TSX: HUL, HUL.U

        ✓         ✓

Harvest US Bank Leaders Income ETF

HULB, HULB.U

        ✓         ✓

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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Disclaimer

You will usually pay brokerage fees to your dealer if you purchase or sell units of the Fund(s) on the TSX. If the units are purchased or sold on the TSX, investors may pay more than the current net asset value when buying units of the Fund(s) and may receive less than the current net asset value when selling them. There are ongoing fees and expenses associated with owning units of an investment fund. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in these documents.

Certain statements in the Harvest Blog are forward looking Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or  “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS.

FLS are not guarantees of future performance and are by their nature based on numerous assumptions, which include, amongst other things, that (i) the Fund can attract and maintain investors and have sufficient capital under management to effect their investment strategies, (ii) the investment strategies will produce the results intended by the portfolio managers, and (iii) the markets will react and perform in a manner consistent with the investment strategies. Although the FLS contained herein are based upon what the portfolio manager believe to be reasonable assumptions, the portfolio manager cannot assure that actual results will be consistent with these FLS.

Unless required by applicable law, Harvest Portfolios Group Inc. does not undertake, and specifically disclaim, any intention or obligation to update or revise any FLS, whether as a result of new information, future events or otherwise.

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