Should You Currency Hedge Your Portfolio? | Common Sense Investment with Ben Felix 

Me exhaling longer than normal

Best lines to go with 👍🏼

Thanks Mathew! I appreciate the feedback. Good question about crypto currencies. The best answer that I can give is that it is too early to speculate on the future value of cryptos relative to traditional government-backed fiat currencies. I am planning to release a video on BTC in the coming weeks. Stay tuned.

Ben Felix awesome, thanks for the reply. In my opinion, cryptos will significantly devalue traditional fiat currencies. Well see!

Also see: www.canadianmoneyforum.com/showthread.php/16432-XSP-(hedged-S-amp-P-500)-tracking-and-drag

I agree with you in general, but hedging has gotten much better over time in terms of accuracy and costs. There can also be tax implications - if the hedge works, you will incur gains on the forward contracts in that year. Any benefit from hedging is more psychological than anything else.

@@BenFelixCSI how do you feel about this now? American thinking Australian and Canadian total markets exposure soon.

@@BenFelixCSI I’d also love to hear your thoughts on this. I live in Germany and have euros, but my dividends are paid from US companies, so are converted to euros. The value of the dollar relative to the euro has dropped lately with inflation.

I was looking into some bond ETFs over the past couple of days, and I noticed that the US Treasury ETFs, even the short term ones, had a habit of having pretty high volatility, which kinda made me nervous. Then I compared them to some European short term bond ETFs (I'm Dutch) and I was really confused by the fact that the European bond ETFs were so much less volatile. The thing is that the volatility didn't come from the bonds themselves, but from fluctuating currency exchange rates. For the emergency fund part of my portfolio, I'm okay with it dropping 1-2% over a period of time, but I definitely don't want to be exposed to this level of exchange risk. The bonds are there as a store of value in order to cover short term expenses, not to speculate on currency exchange rates, and I definitely don't want my emergency fund to be on a roller coaster. I'm either going to go with a short term European government bond ETF, or a short term US Treasury bond ETF hedged to Euro.

This is completely wrong. Diversification is known in investing as the only free lunch for a good reason. If you invest in one company, you are taking on market risk, meaning the risk that the market as a whole does well or poor. That's a priced risk known as the equity risk premium. Additionally, if you are investing in that one company, you're also adding in idiosyncratic risks, for example the risk that that one company, or its sector, or its country does poor. Those are not priced risks, meaning you do not have a higher expected return for taking those risks. There's a big difference between priced risks and unpriced risks. As an investor, it's important that you understand that concept.

I'm not an expert, but my impression is that they will be buying the same underlying stocks, and those companies will be paying out in their currency. So apple will still be paying out dollars. The country doing the paying out might have taxes though. I'd google around and see if and how it's affected on a case by case basis.

No, that is not hedging.

Tough question. Timing currencies is just as hard as timing stocks even at extreme valuations. I'd pick a constant strategy and stick with it.

@@BenFelixCSI Cheers Ben

Interesting question. I think this is one of the cases where"the market can remain irrational longer than you can stay solvent" is relevant. We are talking about currency prices not appreciating or depreciating over the very long-term. Over a given shorter period of time the currency movements are still very risky.

Earnings multiples predict real returns. To the extent that prices are high because of a low risk-free rate, lower real returns should be expected.

No you're not.

prove it!

@@BenFelixCSI 😆

If the pound went back up to $2 while investing at that time and cashing in if it went back to $1.27 would be a win, there is no guarantee that it would never fall back below $2 or indeed continue to increase.

Matt True. Terry Smith says there is no effective true hedge for currency risk, best thing to do is just find the best companies that continually grow their profits and not worry about the currency risk. Unless you are in a currency with systemic hyperinflation, currency risk usually becomes insignificant over long durations.

I'm debating the same thing. I'm looking into buying HSH in a non registered account. It tracks the s&p 500 and is hedged but is also a swap/total return etf. So gains from dividends of the s&p 500 show up as capital gains instead of as dividends. Long term it is beneficial tax wise. But Iwonder if all these added complexities end up costing more then the benefit they bring...

Is old currency like traditional fiat currency/ not crypto? Currency is not interest bearing.

Then why wouldn't you just buy the currency futures contract yourself? That is all the fund is doing to hedge the security, and why they cost more. It is just speculation on the currency either way if you try to time it. You can read the fund's prospectus which will detail exactly how it hedges, and you can do that to speculate. If people could get rich buying fx futures when the currencies got historically low, you'd see a lot more rich people around. The big issue is that the reversion to the mean can take decades and so fluctuations of even 50% are not large enough to be profitable over those time frames. The hedging instruments will be priced fairly and so you cannot expect to profit from trading in them. Also, I know Canadians may not like to hear this right now after a few years of currency weakness, but there is no absolute reason the CAD would ever return to parity with the USD again just because it has had cycles like that in the past, even if it is likely. I think trading currencies is the best way to lose money possible. Trying to time the market on stocks could still see you capture some of the market's returns, but the natural or fx provides no expected returns to capture and so ineffective trading will just have your expected returns be the costs you are paying out likely enhanced by the fact that there are loads of experienced sharks looking to take you out.

U should watch the video about the s&p 500

No, that is assuming that first the index appreciates and then the currency depreciates. But if the two happen concurrently, their is no return at all.

Thank you John Paul!

Currency is not a good investment. It might be a good tool to use for short term speculation, but currency does not have a long-term expected return.

If you look at it as you will be right 50% of the time and wrong 50% of the time if you are hedged or not, by staying consistent on average you will be right 50% of the time. If you keep changing from being hedged to not and vice versa, you lose this statistical advantage and introduce more risk. You could be right 100% of the time or wrong 100%. That's what I understood from it anyway.

@@scottpepper1176 if "truely" random, changing strategy should statistically not make any difference on the "right" or "wrong" outcome probability each time. imagine roulette: your chance of winning remains the same, no matter whether you consistantly bet one coulour or change coulours all the time. or: if changing strategy for one guy increases likelyhood or "wrong outcome", then you would have a predictor about what the right strategy is going forward (his existing one) for everybody else. and you would become a billionnaire (and Nobel laureate). changing is bad because it generates cost for no reward.

@@thowa1 Ah okay, that makes sense. Thanks for explaining.

Correct. If you own foreign securities and your currency depreciates relative to foreign currencies the value of the securities as measured in your home currency will increase.

No, that's the exact opposite of what he said.

@@alex2143 no he is right if he takes an hedge CAD on sp500 ETF and he is thinking SP500 goes up and CAD goes up then the Hedge is what he needs as he will get the perf of the ETF in CAD which has gained value.

@@h264hd no, what Felix said is you shouldn't expect hedging to change your returns long term. Hedging based on a hunch is gambling and active investing which Felix advises against

Read this papers.ssrn.com/sol3/papers.cfm?abstract_id=3964908 Foreign currency helps in the long run, at least historically.

@@BenFelixCSI I will, thank you!

I'm not sure I understand the question. An unhedged equity fund does not need to be purchased in the currency that it is exposed to. For example, XUU is an unhedged US equity ETF that can be purchased in Canadian dollars. All unhedged means is that if USD appreciates relative to CAD, the fund holders get a positive return. In a hedged fund that currency effect is eliminated. Does that answer the question?

@@BenFelixCSI I think he meant that hedged ETF's tend to have higher ETF MER fee's, therefore choosing unhedged would lead to a high er portfolio value over the longterm (since there is no evidence that one would be better than the other we can assume the CAD$ would be back to where it was when you began)

Even assuming you're completely right about your predictions, hedging still doesn't make sense in this hypothetical scenario, because why would you wanna be in the US stocks if you're confident there's a recession coming. Your losses on US stocks are gonna be a lot more significant than the potential currency risk!

You can avoid conversion fees with Norberts Gambit look it up.

@@paulvrana5300 That's more work, who needs more work ?