The case for long-term investors ignoring currency risk in their portfolios has never been stronger.
The return from the S&P 500 stock index, dividends included, was an annualized 7.47 per cent for the 20 years to Nov. 30. If you converted that return to Canadian dollars, you get 7.46 per cent. Virtually the same story is told by the 30-year numbers – the S&P 500 made 9.99 per cent in U.S. dollars and 9.88 per cent in Canadian dollars.
There have been huge currency fluctuations during the past several decades, of course. Our dollar was worth more than an American buck back in 2007, and traded below 70 cents (U.S.) early this year. But the ups for our dollar completely offset the downs for investors who have held through two or three decades.
These numbers can help us make an attempt at defining who exactly is a long-term investor. For the purposes of deciding whether to worry about currency, it's 20-plus years. If you're investing in your 20s, 30s or early 40s, there's no need to worry about whether you should be hedging your exposure to the U.S. market. Hedge or don't hedge – the results for the past few decades suggests it makes no difference.
The experience of the past five and 10 years is much different. The U.S-dollar version of the S&P 500 made 6.89 per cent over the 10 years, while the Canadian dollar version made 8.65 per cent. The S&P 500's annualized return for the five years was 14.45 per cent in U.S. dollars and 21.02 per cent in Canadian currency.
This data suggest that if you have a time frame of less than 20 years for your investments (maybe you're in your 50s and will retire in your 60s), then you should give some thought to currency risk. The question then comes down to whether you should go hedged or unhedged for your U.S. exposure.
Unhedged was unquestionably the right choice for the past 10 years, and many money managers continue to believe that's the way to go. But it's worth noting that the unhedged approach does best when the dollar is weak. If our buck rises, then hedged funds will do better.
Rising oil prices suggest our dollar could move higher, but it's also worth considering that financial markets seem to be reading the presidency of Donald Trump as somewhat negative for the Canadian dollar. This uncertainty argues for the 50-50 approach to hedging. Hedge half your U.S. exposure and leave half unhedged. Of course, this only applies if your investing horizon is less than 20 years. If it's longer, there's evidence to suggest currency risk is a non-factor.
Rob Carrick