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Rob Carrick

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A star-spangled world of pain

Rob Carrick


OTTAWA (GlobeinvestorGOLD) — Prudent diversification into U.S. stocks has produced a star-spangled world of pain for Canadian investors thanks to the strength of our dollar.

That's why one of the smartest ways to play the rising loonie is to own a hedged U.S. equity fund. Hedging means you'll get the returns of the stocks in your funds, minus the fees. Whether the Canadian dollar goes up, down or sideways is immaterial to you because hedging screens this noise out.

There's a lot of disagreement in the investing world about whether it's better to hedge a mutual fund's exposure to the U.S. dollar and other global currencies, or to simply ride the ups and downs. Research shows that over periods of 10 to 15 years or longer, currency moves will pretty much cancel each other out. If your investment horizon spans that length of time, it's certainly an option to do nothing and own unhedged U.S. equity funds or stocks.

But if you've got a shorter span, or if you're tired of watching the strength in the dollar crush returns from investments dominated in U.S. dollars, then consider hedging at least a portion of your U.S. equity exposure. Yes, the loonie could weaken and thereby swing the advantage to unhedged U.S. equity funds. But there are good reasons to believe this won't happen.

Much of the U.S. dollar's weakness is due to the large budget and trade deficits faced by the United States, neither of which look like they can be fixed any time soon. At the same time, Canada's dollar continues to benefit from strong prices for commodities like oil. Mix the outlook for the U.S. and Canadian currencies together and you understand why some forecasters are calling for a 95-cent dollar in the next 12 months and some people have even started to talk about our dollar returning to parity with the U.S. currency.

Virtually all investors need exposure to the United States, given that it's home to the world's dominant stock market. You can do it the hard way, which is without hedging, or you can do it the easy way and buy a hedged U.S. equity fund that uses hedging.

Now, where do you find a hedged U.S. equity fund? It's not easy because fund companies rarely come out and slap a label on fund saying it uses hedging. At best, you'll get some boilerplate in a fund's promotional literature saying the manager has the option to hedge. Still, there are a handful of U.S. equity products that are known to have a hedging strategy in place. Some best bets from this group include:

The appeal of owning these or any hedged funds is that your U.S. investments will reflect what's going on in the stock market, not the currency market. The loonie's current strength may dissipate over the long term, but in the here and now it's massacring investors who made the prudent move of diversifying into the U.S. market.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

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