Comments on: Thoughts on currency-hedged funds http://blog.canadianbusiness.com/thoughts-on-currency-hedged-funds/ Fri, 20 Nov 2009 07:52:10 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: On Currency Hedging and the U.S. Dollar | Genuine Forex Trading http://blog.canadianbusiness.com/thoughts-on-currency-hedged-funds/comment-page-1/#comment-24076 On Currency Hedging and the U.S. Dollar | Genuine Forex Trading Wed, 27 May 2009 10:07:19 +0000 http://blog.canadianbusiness.com/?p=440#comment-24076 [...] The recent decline in the U.S. dollar again puts the spotlight on whether or not investors need to hedge currency exposure when investing in foreign markets. Are the costs worth bearing? I’d like to pass on some additional thoughts to a post I did a little while ago. [...] [...] The recent decline in the U.S. dollar again puts the spotlight on whether or not investors need to hedge currency exposure when investing in foreign markets. Are the costs worth bearing? I’d like to pass on some additional thoughts to a post I did a little while ago. [...]

]]> By: Canadian Capitalist http://blog.canadianbusiness.com/thoughts-on-currency-hedged-funds/comment-page-1/#comment-3374 Canadian Capitalist Sat, 03 Jan 2009 15:47:03 +0000 http://blog.canadianbusiness.com/?p=440#comment-3374 I should point that CN funds have a very short history. The CN funds currently in existence used to be RRSP funds, which used derivatives to skirt the foreign content rules in registered accounts. After the foreign content rules were eliminated, these funds changed the mandate to become CN funds around 2005. Therefore, only the numbers from 2006 and later are relevant when comparing CN funds with USD-denominated funds. I should point that CN funds have a very short history. The CN funds currently in existence used to be RRSP funds, which used derivatives to skirt the foreign content rules in registered accounts. After the foreign content rules were eliminated, these funds changed the mandate to become CN funds around 2005. Therefore, only the numbers from 2006 and later are relevant when comparing CN funds with USD-denominated funds.

]]> By: Larry MacDonald http://blog.canadianbusiness.com/thoughts-on-currency-hedged-funds/comment-page-1/#comment-2568 Larry MacDonald Wed, 03 Dec 2008 14:51:53 +0000 http://blog.canadianbusiness.com/?p=440#comment-2568 Potato I saw only 2 years in CC's post: 2006 and 2007. Anyway, prhaps somebody should call the ETF providers to see how they explain the tracking error. If I get some time, I might give them a call. LM Potato
I saw only 2 years in CC’s post: 2006 and 2007. Anyway, prhaps somebody should call the ETF providers to see how they explain the tracking error. If I get some time, I might give them a call.
LM

]]> By: Potato http://blog.canadianbusiness.com/thoughts-on-currency-hedged-funds/comment-page-1/#comment-2558 Potato Wed, 03 Dec 2008 04:36:07 +0000 http://blog.canadianbusiness.com/?p=440#comment-2558 I went back to CC's post where he used the iShares ETFs, and looking those up I see a nearly 8% difference over 5 years. Ok, that's getting atrocious. So, why is the tracking error so large? Why is it different between different versions of what is essentially the same product? Why is it not covered in the extra MER? I went back to CC’s post where he used the iShares ETFs, and looking those up I see a nearly 8% difference over 5 years. Ok, that’s getting atrocious.

So, why is the tracking error so large? Why is it different between different versions of what is essentially the same product? Why is it not covered in the extra MER?

]]> By: Potato http://blog.canadianbusiness.com/thoughts-on-currency-hedged-funds/comment-page-1/#comment-2553 Potato Tue, 02 Dec 2008 23:49:33 +0000 http://blog.canadianbusiness.com/?p=440#comment-2553 Is the tracking error really that bad? I'm using the TD e-series funds (US index - S&P500 in this case), and so far there has been a bit of a tracking error hit to the currency neutral version (CN) vs the USD version in excess of the MER, but I'm not sure I would call it atrocious: CN USD YTD: -34.6 -33.1 2yr: -16.6 -14.9 3yr: -7.3 -5.8 5yr: -1.3 -0.3 The error seems to go from 1-1.7%, but it's not monotonically accumulating against the buyer: the 5-year error is less than the YTD tracking error, and only about 0.25% larger than the difference in the MERs would dictate. I haven't compared the Canadian dollar version of the same fund because I haven't looked up the exchange rates to compare properly, but feel free to do that for me :) A longer timeline for comparison would be nice, but for me, knowing that I could give up up to 2% plus the small increase in MER (another ~2% hit after ~10 years) is worth knowing that I won't have to deal with currency conversions that can swing up to 40% on timelines of ~decades. If I've got my math wrong, and that's an <i>accumulating/compounding</i> 1+% hit every year, then I'm not going to be as in favour of hedging! Is the tracking error really that bad? I’m using the TD e-series funds (US index – S&P500 in this case), and so far there has been a bit of a tracking error hit to the currency neutral version (CN) vs the USD version in excess of the MER, but I’m not sure I would call it atrocious:

CN USD
YTD: -34.6 -33.1
2yr: -16.6 -14.9
3yr: -7.3 -5.8
5yr: -1.3 -0.3

The error seems to go from 1-1.7%, but it’s not monotonically accumulating against the buyer: the 5-year error is less than the YTD tracking error, and only about 0.25% larger than the difference in the MERs would dictate.

I haven’t compared the Canadian dollar version of the same fund because I haven’t looked up the exchange rates to compare properly, but feel free to do that for me :)

A longer timeline for comparison would be nice, but for me, knowing that I could give up up to 2% plus the small increase in MER (another ~2% hit after ~10 years) is worth knowing that I won’t have to deal with currency conversions that can swing up to 40% on timelines of ~decades.

If I’ve got my math wrong, and that’s an accumulating/compounding 1+% hit every year, then I’m not going to be as in favour of hedging!

]]> By: Larry MacDonald http://blog.canadianbusiness.com/thoughts-on-currency-hedged-funds/comment-page-1/#comment-2548 Larry MacDonald Tue, 02 Dec 2008 14:41:51 +0000 http://blog.canadianbusiness.com/?p=440#comment-2548 John I hadn't thought of using the HDD. I'll have to look into it. LM John
I hadn’t thought of using the HDD. I’ll have to look into it.
LM

]]> By: Larry MacDonald http://blog.canadianbusiness.com/thoughts-on-currency-hedged-funds/comment-page-1/#comment-2547 Larry MacDonald Tue, 02 Dec 2008 14:40:28 +0000 http://blog.canadianbusiness.com/?p=440#comment-2547 CC The tracking errors you show in your post are sizable. So it looks like the extra 15 basis points in MER covers only a fraction of the hedging operation, with the rest covered by the tracking error. Is there data for more than the two years? CC
The tracking errors you show in your post are sizable. So it looks like the extra 15 basis points in MER covers only a fraction of the hedging operation, with the rest covered by the tracking error. Is there data for more than the two years?

]]> By: John Gan http://blog.canadianbusiness.com/thoughts-on-currency-hedged-funds/comment-page-1/#comment-2543 John Gan Tue, 02 Dec 2008 06:56:34 +0000 http://blog.canadianbusiness.com/?p=440#comment-2543 I use the HDD (beta pro US$ Bear) to hedge my US $ stocks. It's easier for me than going to the bank to do forward contracts or play the F/X futures. As the HDD is 2 times the change of the US/Cdn$ and I only need to put up 30% margin, in effect I only need to put out 15% to hedge 100% of my exposure. John John I use the HDD (beta pro US$ Bear) to hedge my US $ stocks. It’s easier for me than going to the bank to do forward contracts or play the F/X futures. As the HDD is 2 times the change of the US/Cdn$ and I only need to put up 30% margin, in effect I only need to put out 15% to hedge 100% of my exposure.

John

John

]]> By: Canadian Capitalist http://blog.canadianbusiness.com/thoughts-on-currency-hedged-funds/comment-page-1/#comment-2535 Canadian Capitalist Tue, 02 Dec 2008 04:05:47 +0000 http://blog.canadianbusiness.com/?p=440#comment-2535 Currency-neutral funds have a relatively short history but so far, the tracking errors of these funds is just atrocious. It would be interesting to see how the 2008 returns compare with their benchmark but if the tracking error is consistently more than 1%, it may be best to avoid these funds entirely. Currency-neutral funds have a relatively short history but so far, the tracking errors of these funds is just atrocious. It would be interesting to see how the 2008 returns compare with their benchmark but if the tracking error is consistently more than 1%, it may be best to avoid these funds entirely.

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