Why investors should hedge their hedging strategies

Currency-hedging is often a black-and-white matter for investors, but taking a less definitive approach might be wiser for those who have less conviction about the shortterm prospects for the Canadian dollar, says Trevor Cummings, head of ETF business development at RBC Global Asset Management.

“Maybe a third option is to be currency-neutral,” he said in a phone interview this week.

Mr. Cummings suggests investors without a firm currency stance should hedge half their international exposure through mutual funds or exchange-traded funds that are Canadian dollar hedged, and invest the other half in an unhedged but identical fund.

For example, they could invest 50% in RBC’s loonie-hedged Quant U.S. Dividend Leaders ETF (RHU/TSX), and 50% in the same fund offered in U.S. dollars (RUD/TSX).

If the loonie goes down to US60¢, half of the portfolio benefits and half does not using this strategy, he said. On the other hand, if the loonie returns to par with the greenback, the same is true.

“It is the position of least regret, because you are never going to be more than half wrong,” he said.

Mr. Cummings said it is debatable to what degree equity investors should hedge their currency risk, but thinks fixed-income investors buying global bonds should always be entirely hedged.

“I think it’s pretty clear cut,” he said. “You can lose an entire year’s return in fixed income in a very short period due to foreign exchange, so, as a matter of policy, it is probably a good idea to hedge all of your fixed-income exposure.”