A window of opportunity has opened for Canadian investors to bank up U.S. dollars in their investment portfolios and get more buying power to expand their international holdings.
The Canadian dollar is currently trading at close to 80 cents to the U.S. dollar – a big increase from a year ago, when it dipped below 70 cents at the onset of the COVID-19 pandemic as global trade almost froze and resources prices cratered.
“It’s always good to buy the U.S. dollar when Canada is strong relative to the U.S.,” says Paul Harris, partner and portfolio manager at Harris Douglas Asset Management Inc. in Toronto.
Canadians are notorious for overweighting their portfolios with publicly listed Canadian equities, two-thirds of which are resources or finance-related and total less than 3 per cent of publicly traded global equities.
“For Canadians, there are many sectors we just don’t have in this country or one stock dominates. To get access you really need to look at U.S. or global companies,” Mr. Harris says.
That leaves more than 97 per cent of the world available to minimize overall portfolio risk and maximize opportunity by diversifying into other sectors and geographic regions. For Mr. Harris, that means big banks with a global reach, pharmaceutical companies, biotechnology, health care, and many of the high-flying technology stocks that have benefited from the pandemic-related lockdowns.
“I see a lot of global opportunities in the technology sector. I think it will continue to have good earnings growth,” he says.
Canadians have the ability to hold U.S. dollar trading accounts in their registered retirement savings plans and tax-free savings accounts.
While roughly 50 per cent of all publicly traded companies are based in the U.S., the greenback is the global standard, giving the U.S. dollar a global reach for investors. Mr. Harris says even investing in U.S.-domiciled companies can bring global exposure because many big U.S. companies do business around the world.
“Many U.S. companies are much more global from a revenue base and you end up getting a chance to invest in companies that are doing business in all parts of the world,” he says, adding the companies themselves often reduce currency risk on behalf of investors.
“Many large companies hedge their foreign exchange exposure. They know better than me what their cash flows are.”
As a general rule, Harris Douglas Asset Management splits its Canadian and U.S. dollar-denominated trading evenly, but for individual Canadians determining how many U.S. dollars to hold in their accounts depends on where they will be spending it in retirement.
“If you’re older and tend to travel, like a snowbird, having access to U.S. dollars makes a lot more sense,” Mr. Harris says.
Of course, individual investors can always cash in their U.S. dollars for Canadian dollars when the loonie changes direction and loses value.
“We’re certainly approaching the upper end of the range for the Canadian dollar’s valuation,” says Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. A country’s currency is only as strong as its economy, and he sees weakness ahead for Canada as commodity prices and the booming housing sector soften.
“The downside I see for the Canadian economy is that Canada remains heavily reliant on funding from international sources, and we could see a squeeze as those sources reverse flows,” he says, adding Canadian investors should move quickly to buy U.S. dollars before the window of opportunity closes.
“It could be a matter of weeks to months before it reverses. I’m guessing you’re looking at weakness toward the latter half of the year,” Mr. Schamotta says.
He notes that Canadian investors should build their U.S. trading accounts strategically by diversifying their entry points over long periods of time.
“The same rules that investors use in allocating to investments makes sense: dollar-cost averaging, gradually purchasing dollars over time when you see an opportunity,” he says.
Mr. Schamotta says investors should be cautious about the hidden costs of investment products that hedge the Canadian dollar on their behalf. Mutual funds and exchange-traded funds (ETFs) that offer corresponding hedged versions can charge up to 50 basis points more annually for protection against fluctuating currencies. That translates into $500 on $100,000 invested every year.
“The cost is very high and that can subtract from your returns in the long run,” he says. “The funds have to pay transactional costs and they have collateral costs they need to manage. They need to ensure they have funds for margin and there are just operational difficulties involved.”
Mr. Schamotta says hedging a strong Canadian dollar doesn’t make a lot of sense from a pure investment perspective as any U.S. dollar investment would increase in value if the loonie weakened. However, he says the extra cost of hedging could be worthwhile for investors who want to eliminate any risk if the loonie flies higher.
“The hedge tools are probably best for someone looking to preserve income and wanting predictability,” Mr. Schamotta says.