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Gold is supposed to be a hedge against calamity, but this year it generated its own brand of pain as it plunged 26 per cent.LEONHARD FOEGER/Reuters

Exchange-traded funds have made it easy for investors to protect themselves from foreign currency fluctuations with so-called "hedged" products, but Canadian investors aren't going to celebrate this accessibility as the year winds down. That's because 2013 was a dismal year for hedging.

The best-known hedged ETFs in Canada are those that track U.S. and foreign stock market indexes but do so in Canadian dollar terms.

For example, iShares offers ETFs that track the S&P 500, the Nasdaq 100 and the Russell 2000, all hedged to the Canadian dollar.

The attraction is easy to see: With many observers worried about rising U.S. government debt, monetary policy experimentation by the Federal Reserve and political dysfunction in Washington, the U.S. dollar doesn't look like an obvious winner.

For Canadian investors who liked the idea of investing in vital U.S. companies such as Apple Inc., Google Inc. or General Electric Co. but didn't want exposure to the U.S. dollar, these hedged products were an easy sell.

The infatuation with gold in recent years has, in many ways, reflected the belief that the U.S. dollar in particular – and paper money in general – are doomed to failure.

The problem? The U.S. dollar has performed just fine in 2013, the Canadian dollar has fallen to three-year lows (to 94.5 cents against the U.S. dollar from above $1 at the start of the year) and hedged ETFs have lagged their benchmarks by a substantial margin.

A Canadian investor who bought an ETF tied to the S&P 500 is enjoying year-to-date gains of 35.8 per cent, after factoring in dividends and converting stronger U.S. dollars into weaker Canadian dollars. The hedged ETF, which didn't benefit from the strong U.S. dollar, has lagged this performance by 7.7 percentage points.

No wonder iShares launched an unhedged S&P 500 ETF in April, trading in Toronto – although investors have long been able to buy similar ETFs that trade in New York.

Similarly, the hedged Nasdaq 100 ETF has lagged the real thing by 8.2 percentage points and the hedged Russell 2000 ETF has lagged by 7.9 percentage points. Even the hedged MSCI EAFE ETF, a very broad index that tracks markets (and currencies) in Europe, Australasia and the Far East has lagged the unhedged version by 6.3 percentage points.

What makes this underperformance sting even more is that hedged ETFs tend to have considerably higher fees than unhedged versions, because of the extra layer of work involved in running the funds.

Index ETFs are by no means the only hedged investments that didn't work out this year. Gold, besides being a hedge against the U.S. dollar, is also seen as a hedge against inflation and global economic mayhem; it has fallen 26 per cent, putting it on track for its worst annual performance in more than three decades.

And the iPath S&P 500 VIX short-term futures exchange-traded note – a hedge against rising stock market volatility – has fallen 63 per cent this year.

Of course, hedges aren't necessarily seen as a road to riches. By definition, they are supposed to act as a type of insurance against downside risks. They work best when those risks arise.

But for anyone who thought of popular hedges as a way to boost returns, the strength of the U.S. dollar, the improvement in the economy and the low level of inflation are bound to be a big disappointment.

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