The Globe and Mail

Invest globally, they said.

Stop being so hung up on Canada, they said.

You listened and diversified your portfolio so you had more exposure to the U.S. and global markets.

Now, you're having your butt handed to you by the soaring Canadian dollar.

More global and international equity funds were sold on a net basis this year (new buys minus redemptions) than any other category. Now, with the loonie up about 7.5 per cent this year against the U.S. dollar, a lot of investors have to be asking themselves if they made a mistake by selling their hugely profitable Canadian investments and buying U.S. and global content.

The strategy of going global is sound, even imperative at a time when the Canadian market is close to halfway through a fifth straight good year. It's the execution of this strategy that gets people into difficulties, or more specifically, the lack of attention to currency hedging.

It sounds very high finance, but currency hedging is simply the use of derivatives like options and futures contracts to screen out the impact of currency moves on the price of a foreign stock. Don't try this at home. Instead, find a currency-neutral mutual fund or exchange-traded fund to mix into your foreign holdings. You'll pay a bit extra for these funds, but the net results are worth it.

Take a look at two versions of the TD U.S. Index Fund, a vehicle for getting similar returns to the widely followed S&P 500 stock index. The conventional version of the fund lost 3.3 per cent in the three months to April 30, while the currency-neutral version made 2.8 per cent.

Now, take a look at the same two versions of the TD International Index Fund, which tracks the Morgan Stanley Capital International Europe Australasia Far East Index. The regular version made 0.07 per cent in the past three months, while the currency-neutral version made 3.61 per cent.

There's a school of thought that currency hedging is superfluous to those who can hold a fund for 10 to 15 years or more. Over long periods like these, currency ups like we're seeing today should be cancelled by downs like we saw through the 1990s.

There are two problems with this view. One is that it offers nothing to investors with a shorter time frame or who put a major emphasis on preserving their capital. The other problem has to do with investor psychology, or rather the way people react when they follow sensible advice (go global) and end up getting shredded from the outset. At best, these investors are stressed. At worst, they sell and negate the benefits of global diversification.

Currency-neutral mutual funds and ETFs are the answer. Figure on using them for half or more of your global exposure. Try a conventional U.S. equity fund paired with a hedged U.S.-market ETF.

The Canadian dollar is going to slump eventually, and that will give the performance edge to unhedged global investments.

For now, just the opposite is happening.

Don't let it spoil your very sensible foray into the broader world of investing.

Hedge products

Managers that offer currency-neutral funds:

TD Asset Management, RBC Asset Management, Dynamic Funds, Fidelity Investments.

Funds that hedge:

Mackenzie Cundill family, RBC's O'Shaughnessy U.S. Value, Franklin Templeton's Mutual Beacon, Mutual Discovery, AIC's American Focused.

Other ways to hedge:

iShares CDN S&P 500 Index Fund (XSP), Claymore U.S. Fundamental Index ETF C$ Hedged (CLU), iShares CDN MSCI EAFE Index Fund (XIN) and Claymore Japan Fundamental Index EFT C$-Hedged (CJP). rcarrick@globeandmail.com