Morningstar Minute - When to buy U.S.-dollar funds

If part of your savings is in U.S. dollars, buying a fund’s USD version may be better than going with currency-hedged, says Morningstar’s Wendy Stein.

Morningstar Canada 28 July, 2017 | 5:00PM
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Wendy Stein: Funds that invest in U.S. securities expose Canadian investors to not only the ups and downs in the prices of those securities but also the ups and downs of the value of the Canadian dollar against the U.S. dollar. This is because a U.S. equity fund that you buy in Canadian dollars must first convert to U.S. dollars before the fund manager can buy securities on a U.S. stock market. The reverse happens with performance: The daily price of the fund is converted back into Canadian dollars before the return is calculated. Currency, of course, can either help or hurt performance. A falling dollar boosts the returns of your U.S. investments, and a rising dollar does the opposite.

One way to reduce the impact of currency fluctuations on investment performance is to use a version of the fund that hedges its currency. Many funds offer both a currency-hedged version and a non-currency-hedged version. And below the video player are links to articles we've recently on currency hedging.

Another option is to buy the U.S.-dollar version of a fund. Many funds have both a U.S.-dollar and a Canadian-dollar version. You buy these funds in U.S. dollars and when you sell, you receive the proceeds in U.S. dollars. Fund companies calculate separate daily prices for both the Canadian- and U.S.-dollar versions, which means your performance is reported in U.S. dollars. This approach gives you pure exposure to these U.S. securities.

If a U.S. equity or fixed income fund has both a currency-hedged and a U.S.-dollar version, their performance should be similar. So, how do you know which approach is right for you? If you receive part of your income in U.S. dollars or you already have a large sum of U.S. dollars that you don't want to convert right away, then a U.S.-dollar account might make sense. But if all your savings and sources of income are in Canadian dollars, then a fund or ETF that hedges its foreign currency exposures might be a better option. You can use the Fund Finder on to search for U.S.-dollar funds by selecting the U.S. dollar currency option.

For Morningstar, I'm Wendy Stein.

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